Archive - Jul 15, 2011

This discussion of "tradition" in the context of "value" is the central problem of our financial age. The question of faith in valuations is at the very heart of the ongoing crisis, infecting all facets of finance and economics. Almost three years after a major banking panic, we are still wrestling with the idea of valuations, and more innately, value itself. Economic and financial unease and uncertainty trace their roots to the shaky valuations that have been provided or interjected into every marketplace, keeping up with the grand tradition of fiat currencies and centralized policy. For example, U.S. treasuries are supposed to be, pardon the pun, the gold standard of riskless assets. Yet they are increasingly questioned (ask Bill Gross and China). The value of the paper is a derivative function of the ability to tax, as in full faith and credit of the United States. But the same is also true of Greek paper, as sovereign Greek debt derives its value from the Greek government's ability to tax. Yet U.S. debt is more "valuable", in money terms, than Greek debt solely because the Greeks have a "tradition" of default while the U.S. does not. Tradition matters.

Nobody could have foreseen this now typical Friday night bomb from the 200 West macroeconomic wrecking crew. Nobody. Well... "Here is the first official Q3 GDP downgrade, courtesy of JPM's Michael
Feroli. We fully expect every other clueless Wall Street lemming to
follow suit in minutes." But as long as the lemmings all move in a herd over the cliff, they will still somehow all get paid the same $5 million (of which 25% is cash and the rest is indentured cliff-vesting equity servitude) at the end of the year. Either way, can we all now agree that Goldman did indeed jump the shark in December, especially now that it sees Q1 GDP at below stall speed in real terms. So here it is: "Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012." Here is why Hatzius gets paid the big Bernankebux: "The “bugbear” is that we are still unsure about the precise reasons
for the slowdown in 2011 to date, which is sharply at odds with our
expectation at the end of last year that growth would accelerate in
2011." And the punchline: "Our forecast remains no fresh monetary easing from the Federal Reserve, but the probability has risen. In particular, Fed officials would undoubtedly ease if the economy returned to recession—not our forecast, but clearly a possibility given the recent numbers." Our prediction is that when Bill Dudley's 2011 calendar is released in December, his first meeting with Jan Hatzius at the Pound and Pence will have taken place right.... about.... now.

Either this is a hell of a coincidence or something much more sinister...

If it's the latter, this is so blatant and so in your face it is ridiculous.

As usual, attached is the complete set of "charts that matter" next week from Goldman's John Noyce, which will hopefully be a useful source of technical clues for anyone trading the all too critical EURUSD which has become the defacto driver of global risk courtesy of 100% correlated ES algos. Being the primary variable doesn't make it any easier to predict: as Noyce observes, "EURUSD trades to new lows then squeezes back into the range - as ever this leaves quite a confused ST picture which makes it difficult to make a strong daily chart based call. The daily chart setup has again become confused at best, but the underlying structure still looks heavy and as such a sell on rallies bias still seems the one to stick with." While in the past we have agreed with Noyce outright (we is by far the best technician at Goldman) this time we are concerned that the EUR is the only one looking at big weakness. The reason why a straddle may be the best trade ahead of next week is that by next Friday many question marks should disappear: on July 21 the Euro parliament will convene for an emergency meeting at which some speculate Greece's fate may be decided, leading to a "soft" or "transitory" default which will send the EUR plunging at least briefly. On the other side of the Atlantic, we have Congress which is supposed to reach a decision (or not) by Friday the 22nd in order to meet the August 2 deadline. If no solution is reached in the next week, it will be the dollar's turn to plunge. So yes, next week will be critical. In addition to the above, Noyce touches on the technical breakout patterns in the BTP and the SPG chart, associated euro FX correlations, and the recent breakdown in JPY. Probably the biggest question is whether the right shoulder of the S&P H&S formation means a major drop back to the 1,260 level is imminent.

"They’re going to cut back the bone and they’re going to keep the fat, basically. They’re going to try to panic the population into acquiescing in a Democratic Party sellout by cutting back payments to the people...while making sure that they pay the Pentagon, they pay the foreign aid, they pay Wall Street." Michael Hudson

While we may not make that much stuff in America any more, we can say that the nation's gigantic wealth inequality is totally Made in the U.S.A. Before we examine the data in some charts, I want to stipulate that great wealth in and of itself does not make a person an "enemy of the people" or threat to democracy. I confess to having generally lumped the top 1% of wealth holders into one category, something I have decided to stop doing, as this misses two critically important distinctions: 1. Not all wealth is created equally; 2. Wealth destroys democracy and free markets when it buys the machinery of governance. Much of the debate about wealth inequality focuses on whether the super-wealthy are "paying their fair share" of the nation's taxes. If we refer to point 2 above, we see that if the super-wealthy are allowed to buy the machinery of governance, then they will never allow themselves to be taxed like regular tax donkeys. In that sense, the debate over tax rates is pointless, because as long as the super-wealthy own the levers of Federal governance and regulation, then they will buy exclusions, loopholes, rebates, subsidies etc. which relieve them of whatever official tax rates have been passed for public consumption/propaganda purposes.

The one stop summary of all the key positive and negative news in the week that was.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 15/07/11

The Treasury may be ceasing the incremental funding for its market manipulative efforts.... but not quite yet. Presenting the E-mini surge on absolutely no volume. According to Chicago floor traders, at least one bank bought 150 S&P contracts at very the close with one obvious purpose: ramp the stock market into the weekend. Luckily, for the observant ones this is merely another free money opportunity: the ES-RISK spread just soared and presents the latest compression opportunity.

After pillaging the G Fund and Civil Service Retirement and Disability Fund (CSRDF), aka the Government retirement funds, Tim Geithner was just forced to resort to the final debt ceiling extension measure: suspending reinvestment in the Exchange Stabilization Fund, better known as the mechanism by which the Treasury manipulates the stock, bond and FX markets, often times indirectly (thank you Brian Sack and Citadel fat pipe) and on occasion with CIA assistance. What this means is that FX vol will likely hit unseen levels in the next several weeks as the Treasury's manipulative ways are strongly curtailed.

Today's 'Friday Humor' section consists of two parts: one is high brow, the other... not so much.

Moody's which is already not all that loved in Portugal, is about to make some more friends after it just downgraded the 7 biggest Portuguese banks, all of which, incidentally, passed the Stress Test that nobody remembers any more.

For what we are about to see next, we must enter quietly into the realm of pure PhD moron--Dr Ben Bernankenstein

When it comes to the debt ceiling, we have heard everyone and the kitchen sink's opinion on this issue at this point. Yet one person who has been silent so far is the original skeptic David Rosenberg. Summarized: "Despite the fear mongering, the U.S. government is not going to default. Any backup in bond yields from a failure to cobble together a deal will drive market rates down because of the deflationary implications from the massive fiscal squeeze that would ensue at a time of a huge 5% output gap. Even if there were to be some sort of "buyer's strike" if the U.S. were to be defaulted, rest assured that the Fed would step in aggressively." Obviously to a mega bond bull like Rosenberg, this is the only possible outcome. After all an alternative would mean the central planners have failed, and the most artificially inflated security in the history of man: US bonds, which are only there because they are the "best of all evils" was enjoying an extended "ignore the emperor's nudity" sabbatical... which alas does not change their evilness, nor is this equilibrium stable once more and more realize it is all about gold at the end of the day. And as yesterday demonstrated when existential fear grips the market, the impossible does happen, and both bonds and stocks can sell off, and in the process lead to all time records for gold. Bookmark July 14: it is a harbinger of what is coming.

It was fun while it lasted. Next up: 1 to 10 reverse split? At least that way the bank will now only hit but triple John Paulson's $30 price target by the end of 2011. In the meantime, only $50 cents or so to go until BAC hits Paulson's cost basis.