Archive - Jul 13, 2011

Hey, it helps the big banks ... so shut up, already!

Update: OBAMA: "THIS MAY BRING MY PRESIDENCY DOWN BUT I WILL NOT YIELD ON THIS" -- REPUBLICAN AIDE; Perhaps Obama may want to put the country ahead of his own interests this one time...

So far the Moody's threat is having precisely zero impact on the debt ceiling farce, with just 8 days left until July 22. But the latest development is certain to jar both S&P and Fitch, not to mention Dagong, out of hibernation. Reuters reports that President Barack Obama abruptly ended a tense budget meeting on Wednesday with Republican leaders by walking out of the room, a Republican aide familiar with the talks said. The aide said the session, the fourth in a row,
was the most tense of the week as House of Representatives Speaker John
Boehner, the top Republican in Congress, dismissed spending cuts offered
by the White House as "gimmicks and accounting tricks." Either Congress has become the best orchestrated reality TV show in history or, and this is a big or, the market should really consider panicking soon.

Recently I compared the 2007 equity topping pattern to that of the current market. The premise being today as in 2007 the US economy is quite possibly entering economic recession. Long gone are the days of equity markets being forward looking as proven in 2007 when they peaked just two months before contraction began. A similar pattern is also playing out in the 10 year treasury. I suspect a topping market is more a function of psychology and less technicals or macro data. The money making bull is slowly dying while the bears are eager for their turn to shine. The result of this clash of views and buying power is dictated more by emotional, whipsawing action where convictions in one's position and volatile price action make coexistence difficult if not impossible.

Wait, what is this? Selling in both ES and bonds? Surely you jest: after all money just goes from one to the other right? Bzzzz. Wrong.

David Galland:
You were involved with Harry Browne during the last great inflation in
the U.S. How does the increase in the money supply that kicked off in
2007-2008 compare in terms of scale to what went on leading up to the
inflation in the ‘70s?

Terry Coxon: The
comparison is pretty muddled. In terms of the M1 money supply – the
total of checkable deposits and hand-to-hand currency – we haven’t yet
gotten near the persistently high growth rate that occurred in the
1970s. But the growth in the monetary base has been far more rapid than
what happened in the 1970s. There is some time delay between growth in
the monetary base and growth in M1, but to make the picture really
cloudy, I'm afraid the comparison turns out not to be very useful.
Unlike in the 1970s, the Federal Reserve is now paying interest to banks
on their reserves.

Had a great lunch with two real estate pros who don't see any recovery in US housing and the risk that the Canada bubble is about to burst...

Risk ES closes. 30 ES points in 3 days. Thank you momos and robots.

BOOM: "The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default. Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range."

Some things I thought worthy of note.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 13/07/11

The Debt Ceiling Reality Show is winding down to its dramatic conclusion on August 2. I think Fox should capitalize on the drama by gathering the American Idol judges to vote on the best performance by a political hack. We can have Ryan Seacrest announce on August 1 at 11:55 pm that the winner is – THE WALL STREET MONIED INTERESTS. The latest round of kabuki theatre performed by the corrupt lying thieves in Washington DC is being played out every night on the MSM. The volume of misinformation, lies, exaggerations, posturing, and propaganda is staggering. These vile excuses for leaders know that 80% of the American population wouldn’t know the difference between a debt ceiling and a drop ceiling. They use this ignorance to their advantage, as Obama warns that old people won’t get their social security checks and government drones won’t be paid.

This chart needs no introduction... or explanation.

Barney Frank, fresh from being caught on live TV picking his nose during Bernanke's Humphrey Hawkins presentation, had a decidedly more sour outlook on the prospects for the debt ceiling. Spoiler alert: in tried and true fashion, the drama king blamed it all on the stupidity and inexperience of republicans. Asked when there is a chance the US will be put into default: "Yes. I take the freshmen republicans and people like Michelle Bachmann
at their word. I don't think they're kidding. I think they fundamentally
misread this situation as Bernanke, a Bush appointee after all, made
clear today. I think there are people that frankly have an unreal view
of the world. They believe that this is somehow a fake and that you can
push a button and make a lot of these debts go away. I believe there are
a substantial number of Republicans who are opposed to a huge debt and a
further group of Republicans who understand why it's important to raise
the debt limit, but are afraid of losing a primary to someone." Recapping Frank's view: why deal with a problem under my tenure, when very soon there will be a congressman who will replace me and he, or more likely she, can deal with the sordid mess I created. And this is not even counting the trillions in GSE off-the-books debt of which Frank was one of the key people responsible for letting it be the catalyst that blew up the credit bubble when Fannie and Freddie were nationalized just under 3 years ago.

The Fed will never be able to reduce the size of its balance sheet. In fact, it will need to begin expanding it soon.

Given the choice between recognizing that we are subtly, but effectively, conditioned and controlled or believing we are free and independent, which way do you think we will lean, particularly if our consumer culture reinforces the ‘free’ belief? Promoted and enabled self deception is always the most effective mind control because we willingly accept the programming and then customize it to suit our own particular belief system, thus assuring its effectiveness.