Archive - Jun 2011

With mainstream acceptance of my presumptions of the potential of serial sovereign debt defaults, its time to take a more realistic look at how it may happen & the potential consequences.

Once again, the non-Greek speaking population has the opportunity to poke fun at G-Pap's vote of confidence reception speech courtesy of Google Translate.

Nothing surprising in the statement.

One notable observation is that for the first time since the Japanese events, the Fed is finally recognized the impact of the Japan-induced contraction. Odd that all the morons who said Japan would be a boost to GDP growth now applaud the Fed's appreciation of reality.

The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. 

With under 10 minutes to go to the FOMC decision, traders are scrambling for hints as to what may be coming. One place they are looking is BAC option activity, as this is a company which is in dire need of some monetary love (and at least steepening, hello OT2) from the Chairman. A quick look at the most actives shows that bullish bets far outstrip bearish ones, with almost 75k January 2012 and 2013 $12.5 calls having traded hands (granted it is unclear from this chart if the bulk of the activity was on the bid or offer side). Anyway, so much for guessing: everything will be revealed in just a few minutes...

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

We read about and hear it every day in the media, and accept it intuitively, but is there really a significant relationship between gas prices and consumer spending, or is it just another convenient excuse for when financial/economic data comes in below expectations?

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

Must be the season of the QE bitch...

I am back to being bearish the high yield market. I am not yet short it, but would certainly recommend being underweight right now. A couple of things have pushed me back to being bearish. The main one is weakness in other credit markets. Once again CMBX is heading lower and back at or near its recent lows. It has not been able to sustain a big rally which is particularly surprising because it is relatively illiquid and is a 'hedge' trade so is usually very exposed to a violent short squeeze. Irish and Portuguese 10 year bond hit new record yields according to Bloomberg - 11.47% and 10.99% respectively at the time of the writing, though Portugal broke 11% earlier in the day...The combination of weakness in other credit markets, coupled by the HYG NAV confirming that liquidity is at an extreme low in the high yield bond market I think it is prudent to cut high yield risk. With European credit closing quite weakly, I may shift to an outright short.

After the ES-RISK (Rates, both absolute and butterflys, FX and Commodities) divergence yesterday brought the spread to a 10 point-wide equivalent, the subsequent lack of positive response to the Greek developments in futures once again closed the spread like clockwork. Well, the 3 day regressed chart (for apples to apples) shows that stocks are once again overeager in advance of the Fed meeting, which leads to yet another convergence opportunity between the two trade legs.

I want to be clear here. The US Dollar is ultimately a doomed currency. But it remains the “flight to safety” trade amongst global currencies (along with the Yen and most of all, Gold). Europe is far worse off than the US. And China’s now seeing a liquidity crisis of its own. With that in mind, we need to consider that the US Dollar may in fact be predicting another deflationary collapse.

Up until this point, Spiegel has been relatively objective in its coverage of the Eurozone implosion (unlike Handelsblatt, which we still await to apologize for losing all of its readers millions if not billions for urging them to invest in Greek bonds because it is their patriotic duty). That is until today. In an opinion piece, Henrik Muller writes that "if the Euro fails, Germany will be responsible" lamenting that it "may seem absurd that Berlin is perceived abroad as 'euro Nazis' rather than as a benevolent leader. But should the common currency fail, Berlin will be to blame."

Just out from Bill Gross:

A week ago we reported on the case of the "The Largest Theft Of Funds In National History" or the missing $6.6 billion in Iraq war reconstruction funding, which was literally composed of "shrink-wrapped bricks of $100 bills", which was part of a $20 billion total in "Marshall Plan" investment meant to stimulate the post-war economy. When discussing this so far undisclosed cash loss, "Stuart Bowen, special inspector general for Iraq reconstruction, an office created by Congress, said the missing $6.6 billion may be "the largest theft of funds in national history." Two new developments have emerged in this fascinating story. The first, as CNBCs Eamon Javers reports is that "The New York Fed is refusing to tell investigators how many billions of dollars it shipped to Iraq during the early days of the US invasion there." Javers adds: "The Fed's lack of disclosure is making it difficult for the inspector general to follow the paper trail of billions of dollars that went missing in the chaotic rush to finance the Iraq occupation, and to determine how much of that money was stolen." Well, for what it's worth, we may have an estimate of this largest war theft ever: talking to Al Jazeera, "Osama al-Nujaifi, the Iraqi parliament speaker, has told Al Jazeera that the amount of Iraqi money unaccounted for by the US is $18.7bn - three times more than the reported $6.6bn." If indeed the total theft amounts to virtually the entire amount of reconstruction spending that could possibly explain why the Fed is so coy in discussing this issue. Alas, just like the Fed's multitrillion bailout of the financial system, it is unlikely it will be able to keep the topic from reemerging, and that very soon - al-Nujaifi adds: "There is a lot of money missing during the first American administration of Iraqi money in the first year of occupation. "Iraq's development fund has lost around $18bn of Iraqi money in these operations - their location is unknown. Also missing are the documents of expenditure. "I think it will be discussed soon. There should be an answer to where has Iraqi money gone." Who will be the next Mark Pittman to sue the New York Fed to get the required information on how much cash the FRBNY was complicit in "disappearing" - we can't wait to find out.

A few months ago we reported on Goldman's proposal to change the definition of GDP to make the US economy appear to be growing faster than it really is. So far, it has not caught on, as even the revised definition will soon confirm a contraction. But that proposal appears to have given Joe Biden some ideas, who now has taken the Fukushima approach to (sur)reality, whereby one merely changes the terms of data measurement when the data does not cooperate. Enter the revised CPI: "Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks." And because nobody has an issue with the current artificial hedonic and otherwise adjustments to the CPI which always reflect a far lower increase in prices than what is actually happening, here comes the government with another idea to make inflation appear to be rising even slower: "According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.  Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government. The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report." What does this mean practically? SImply said, the worst of all worlds for the US middle class: "[the proposal] would likely lead to both lower benefits paid to seniors and higher taxes paid by most people who pay federal income tax." We expect this last-ditch accounting gimmick will be implemented shortly, and the broader American population will not care one bit that it's purchasing power will see a step function drop yet again in the ongoing crusade to destroy the dollar.