Archive - Jul 28, 2011

Where is the money coming from to buy stocks? 

Things are getting real. After all the bluffing, huffing and puffing by Geithner, the rating agencies, and anything with a pulse and a TV or radio pulpit has failed, the last trump card is coming down. While yesterday the Treasury informed that it would not disclose any details of its contingency plan, Bloomberg has just learned via a Treasury leak that the US government will give priority to bondholders. From Bloomberg: "The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official. The official requested anonymity because no announcement has been made. The Treasury has said about $90b in debt matures on Aug. 4 and more than $30b in interest comes due Aug. 15. Overall, more than $500b matures in August." And so it begins: while the Treasury has not yet pushed the big red flashing button, this leak is nothing but it latest and greatest bluff. It also means that America will, indeed default, next week, as the absence of a contractual payment is a default. And then we get into the fine print with the rating agencies whether or not X is default but Y is not. At that point however it won't matter: every form of intermarket liquidity will be permanently gone as Lehman will be a cherished walk in the park. Thank you Tim Geithner and your total lack of contingency plans.

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

Market Recaps to help improve your Trading and Global knowledge

When it comes to sellside research ideas (no matter how wrong) being mysteriously converted into official policy nobody, and we mean nobody in the world, is more effective at this "task" than Goldman. In addition to being a herd leader of all the other momos on Wall Street (with Deutsche Bank being dead last), what Goldman wants, whether it is QE1, QE2, or the final layout of the eurozone bailout package #2, Goldman gets. Which is why people actually do care about Goldman's research: not because it is right, it rarely if ever is, unless of course one gauges its success with the bonus pool for Goldman Sachs itself in which case it has been a massive success without fail, but because everyone in DC reads it as gospel, and whatever is advised is eventually implemented. Which is why even as we have skipped numerous analyses of what would happen to the US should its rating be cut, Goldman's is a must read, not the least because Goldman finally puts all those economic illiterates who compares a US downgrade to that of US and assume off the bat that nothing bad can possibly happen. Wrong. Just ask Jan Hatzius: "It bears repeating that no two episodes are alike – nor is any historical episode a close parallel to current US circumstances." And while even he admits he has no idea what will happen, he doesn't get paid by the blank piece of paper so the Goldman economist did have to supply 4 summary conclusions of what will happen when the US is downgraded, sometime over the next 3-4 weeks: 1. A drop in equity markets, but probably a modest one, 2. Some weakening in the currency, 3. A steepening of the yield curve and a cheapening of Treasuries relative to OIS, 4. Some weakness in the financials sector. In other words, "we have no idea, but it won't be good." We totally agree. The full note is below for those whose brains aren't petrified enough to assume that the Japanese downgrade is in any way remotely comparable to that of the US.

When it comes to the name John Williams, there can be only one. The status quo apparatchik who is the new head of the San Fran Fed is a distant second. Alas, it is his words that are more important today, as in a speech to the Community Leaders of Salt Lake City titled The Outlook for The Economy and Monetary Policy, he just made it clear that should the current re-re-recession within a depression accelerate, more QE/LSAPs are coming. To wit: "Looking ahead, we at the Fed will keep a very close eye on incoming data and adjust our policy as needed to work towards our two policy goals. If the recovery stalls and inflation remains low or deflationary pressures reemerge, then we may need to keep our very stimulatory policies in place for quite some time or even increase stimulus." And unlike Lacker earlier who admitted QE 2 had been a failure, Williams is a liltle more polite: "the Federal Reserve doesn’t have a magic wand that will allow the economy to get through a crisis of this magnitude unscathed." Translation: we have been improvising and we have failed although in the process we have made the rich richer, and everyone else as poor as they ever have been. Lastly, Williams appears to be a fan of the Boehner plan: "There is no question that we are currently on an unsustainable long-run path of federal fiscal deficits. It is essential that budget deficits over the next decade be brought under control." Funny that because it was none other than the Chairsatan himself who every time he is trotted before congress, says that stimulus has to come from a fiscal basis, not monetary. While Congress is obviously full of contradicting idiots, it is a little scary if the same can be said of the Fed as well too.

The debt crisis might be real ... I've been warning about it for years.

The potential downgrade to America's credit is real ... I've been warning about that for years, as well.

But the way that the rating agencies and Wall Street are approaching the debt ceiling debate is a scam. 

Systemic financial instability is spreading rapidly around the globe. Nobody knows the precise timing, of course, but if we consider the systemic causal forces at work, it seems the future is now: the next few months could see unstable markets gyrate wildly and unpredictably as the latent instability breaks out and plays out into the 2012-2013 timeframe. Here are a few of the structural causal factors behind the coming global financial instability.

Those interested in the apex of today's Congressional charade can follow the House debate on the Boehner plan live at the following link. It appears that the House does have enough votes to not only take up the debt-limit plan but to successfully pass it (has to be over 218). As a reminder the actual vote is expected to take place at around 5:45pm.

There are some who may read the following article from Bloomberg titled "Banks Find Few Signs of Default Distress in Repo, Credit Markets" and be left with the impression that banks find few signs of default distress in repo, credit markets. These same people would then be very surprised by the chart below which shows that the overnight repo rate has more than doubled from 0.055% to 0.115%, or the highest in months, overnight. "Big deal, this is just a small jump" others may say. To those others we will retort that in a market as massively levered as the ON repo, which is a primary source of risk free financial institution funding in conjunction with the Reserve market (via the Fed's IOER rate), a relationship we have discussed extensively before. This simply means that the O/N GC-IOER spread is probably the most levered synthetic "instrument" in the known universe. Apply 100x leverage to the spread and the 0.06% change effectively wipes out capital buffer for an entity that was picking up pennies in front this particular steamroller, and has a firmwide leverage of 16x or a Tier 1 buffer of under 6%. Luckily, that same entity will quietly approach the Fed and using one of a plethora of secret and not so secret rescue mechanism, the Fed will merely transfer more electronic ones and zeroes backed up by future tax receipt claims to said entity's debit account and all shall be well, with nobody but the Chairsatan and the occasional Wall Street CEO knowing just how close we came to yet another systemic implosion.

Unlike the past last auctions in the current week, in which the 2 and 5 year both priced far weaker than expected, and saw a surge in Direct bidders absorb the absence of foreign demand, today's 7 Year auction was largely unmemorable. Granted, it did price with a 1.5 tail, coming in at a high yield of 2.28%, after with the When Issued trading at 2.265% second into the close, indicative of last minute weakness, but the other metrics were largely in line. The Bid To Cover came at 2.63, same as last month's, although well below the LTM average of 2.84%. The internals were stronger with Directs not surging as many has expected, and taking down just 9.26% of the auction, meaning Primary Dealers had to consume 51.2% of the auction. That left foreign bidders recycling their trade surplus to take on about 39.55% of the auction, better than last month's 32.17% but worse than the 12 month average of 43.33%. As noted: rather uneventful and on the weak side. What is more disturbing is that absent a debt ceiling hike, this may well be the last bond auction for a long, long time. And without more auctions, what will Bernanke monetize?

Oh boy, the Fraser Institute is at it again...

A snapshot of the US Afternoon session covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

During 2008, traitors like Hank Paulson were able to con most of us by saying that we risked a destruction of the financial system as an excuse to give the banksters and their allies a blank check. The con wasn’t in the notion that the financial system risked implosion as I believe that statement was most likely true. The con was that since most Americans don’t have a clue how the financial system works they merely became scared and reflexively agreed in their own minds that “well of course the financial system must be saved.” I on the other hand argue that the financial system is a ponzi scheme that enriches only the three enshrined parasite classes that dominate America today. The TBTF Wall Street banks, the military industrial complex and the politicians and lobbyists in D.C. that line their pockets. Everyone else gets sucked dry. I have spent the last three years of my life writing about this so that people understand when the next major crisis happens who is to blame and more importantly I want to instill in people the courage to look outside of this immoral money system to something that can move us forward when this one gets dismantled. I do not claim to have the answers I am just trying to get people to ask the right questions and get educated on how things operate. We the People must own the debate or it will own us.

We were pretty much speechless when we read this - it sure puts guarantees by Noyer, Trichet and all the other bureaumonkeys that the ECB does not accept just any collateral in perspective. From Presseurop.eu: "The most expensive footballer in history may now be used to guarantee the solvency of a Spanish bank. “Ronaldo in the bailout fund,” headlines Süddeutsche Zeitung. The daily reports that the Bankia group of savings banks, which financed Real Madrid’s acquisition of the Portuguese player, is now seeking to borrow funds from the European Central Bank. In response to the ECB’s demand for guarantees, Bankio are putting up… Ronaldo and the Brazilian Kaka, who also plays for the Madrid football club. In 2009, Real borrowed 76.5 million euros to pay transfer fees of 100 millions euros to Manchester United, and 60 million to Milan AC."

"...students are still not being taught that they may have to defend themselves." In fact, our students are being taught every single day that the government has control of political, economic, and social life through the arbitrary exercises of power by police, in place of regular operation of administrative and judicial organs of the government such as teachers and principals.