Archive - Jul 2011

We admire the zeal and enthusiasm of Citi's Steven Englander who, like a modern-day Don Quixote, has, courtesy of his long-term bearish EIR call, taken on not only the Fed, but the PBoC windmill as well, which as has been confirmed, is an official buyer of the doomed European currency. This time, instead of reiterating his short EURUSD call, he advises clients to short EURCAD with a 1.3050 price target and a 1.4160 stop loss. The call summary: "We add a new trade to the G10 FX Strategy trade idea portfolio: short EURCAD spot at 1.3850 with a target of 1.3050 and a 1.4160 stop loss. Euro zone downside risks have increased as peripheral debt issues have intensified and spread with the euro zone. Light positioning in CAD and substantial pessimism toward US economic data means that CAD will benefit from positive US and Canadian economic surprises in coming weeks."

It's deja vu all over again. From Bud's Offshore Energy: "We just received word this morning that the Transocean Marianas rig has developed a large crack in one of the pontoons on the #5/#6 anchor chain locker while they were picking up anchors, and is currently taking on water and listing. The bilge pumps are keeping up (barely), but there’s certainly concern that it might sink on location. So far, 68 people have been evacuated from location. According to RigZone, the Marianas was working offshore Nigeria. [Per one of our readers, (see comment below) Petrodata shows the rig operating offshore Ghana.] More: The Marianas, spudded the Macondo in October, 2009, but was damaged by Hurricane Ida and towed to shore. The Deepwater Horizon was the rig that replaced the Marianas."

In what is becoming a multi part series on how various products price in recession tonight it is time to check out the commercial paper markets. Below are two charts (1) showing the last two recessions and how commercial paper rates performed and (2) commercial paper rates since Q2 2009. Both charts utilize non financial AA rated 30 and 90 day terms. The results were similar for financial paper as well. Commercial paper seems to be an excellent market timer of economic recession. Notice the last two periods where rates began falling precipitously and the timing of economic contraction.

In the last 100 years we’ve seen the US Dollar lose well over 95% of its purchasing power. However, once the world collectively dropped the Gold standard (the last hold out, Switzerland, officially went off it in 2000) permitting the creation of endless credit and money printing, the financial system entered a period of relative value. That is, all currencies (which are used to denominate other asset classes) are entirely paper-based and consequently trade relative to each other based on the money printing each central bank engages in.

The biggest farce of the day is about to unfold as Obama holds a "twitter hall" meeting in which he will accept questions, pre-cleared and moderated by Twitter itself, which means congratulations, about the economy and jobs. The town hall can be accessed by using the #AskJobs hash tag or at the website below. As usual, this will be merely another PR debacle in which everyone participating will see the questions which are not being answered, and ignore the softballs lobbed at the teleprompter in chief.

A month ago we reported about Bob Ivry's discovery that the Fed had been conducting a secretive bailout operation between March and December 2008, under which banks borrowed as much as $855 billion over the time frame for a rate as low as 0.01%. As the Fed itself explains following a just disclosed launch of a page dedicated to this Saint OMO, "The Federal Reserve System conducted a series of single-tranche term repurchase agreements from March 2008 to December 2008 with the intention of mitigating heightened stress in funding markets. These operations were conducted by the Federal Reserve Bank of New York with primary dealers as counterparties through an auction process under the standard legal authority for conducting temporary open market operations. In these transactions, primary dealers could deliver any of the types of securities--Treasuries, agency debt, or agency MBS--that are accepted in regular open market operations. By providing term funding to primary dealers, this program helped to address liquidity pressures evident across a number of financing markets and supported the flow of credit to U.S. households and business." Well, not really. As the chart below shows the banks, pardon primary dealers, that benefited the most from this secret iteration of Fed generosity were once again foreign banks, with the Top 5 borrowers being Credit Suisse, Deutsche Bank, BNP Paribas, RBS and Barclays. Together these five accounted for $593 billion of total borrowings, or 70% of the total. So perhaps the Fed should rephrase the last sentence to "supported the flow of credit to U.S. European households and business" which is to be expected. After all, as we have demonstrated before, the European banking system's liabilities are orders of magnitude greater than the US. So in order to preserve the global Ponzi (a main reason why Greece must never be allowed to fail), the biggest weakness that has to be addressed constantly is and will be in Europe.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Not like it matters much, because any bank that is found to be insolvent following the second consecutive European stress test will merely receive more taxpayer funds concealed as an SPV or a CDO or some other "complex" instrument, but for what it's worth Moody's has released a list of banks that it believes will either fail the farce, pardon, test outright, or will be "candidates for additional support going forward." As a reminder, the European Banking Authority (EBA) is about to publish the results of an EU-wide stress test involving 91 banks from 21 countries. The purpose of this exercise was to assess banks’ resilience to adverse external circumstances and to identify vulnerable banks, defined by EBA as banks whose Core Tier 1 (CT1) ratio falls below 5% under at least one of the scenarios included in the stress test. Moody's splits the sample into 4 Groups as follows: Group 1 : investment grade banks (at or above D+/Baa3 ) : 54 banks, Group 2 : non investment grade banks from peripheral countries (Ireland, Greece, Portugal, Spain) : 17 banks, Group 3 : non investment grade banks from other countries (Germany, Slovenia, Hungary, Austria, Cyprus) : 9 banks, and Group 4 : unrated: 11 banks. It is Groups 2 and 3 that are the focus of the analysis and which will be benchmarked against the test to determine credibility. As for the fact that all European banks are insolvent if just one is, just as all of Europe is bankrupt if Greece were to go under, that's a completely separate point.

I haven't found any firm estimates of the unfunded liabilities due in the next 20 years, but since 25% of the entire population (the Baby Boomers) will be retired and drawing on Social Security and Medicare within 15 years, I think we can reckon that about half that $106 trillion will come due in the next 20 years--and that is probably absurdly conservative. $15 trillion down, $35 trillion to go. Do you see how utterly hopeless this exercise is when Federal spending rises by 6.5% every year even as the underlying economy muddles along at 2% in good years and -5% in poor years, if we subtract borrow-and-spend deficit financing? In other words, $100 trillion in unfunded liabilities is the number now, but if spending continues rising at triple the rate of the real economy, then that number will only grow. If we're honest about our accounting, then the U.S. economy hasn't grown at all since 2008; it's shrunk by $6 trillion, a sum we have masked by borrowing and spending $6 trillion in Federal debt, money that replaced the decline of private borrowing and spending. Please look at the charts of healthcare and local government pension and healthcare costs again. Those rocket-launch lines shooting higher cannot be funded by a national income that is flat or declining. We need a national conversation about reality, not wishful thinking. We need to grasp the nettle and talk about triage, about conserving Social Security for those with no other sources of income, and about devoting our scarce resources for palliative and preventive care. The Status Quo is completely, utterly unsustainable, but that needn't bring the nation to its knees--unless we actively insist that it does so.

While without much direct implication for ponzi market navigation strategy and tactics, the attached videos of Phoenix disappearing under a 5,000 foot tall dust storm, which at time was as tall as 10,000 feet, is stunning in its own right. As the Huffington Post reports "the massive dust cloud, also known as a "haboob," was around 5,000 feet when it arrived in Phoenix, but radar data reveals that it reached heights anywhere from 8,000 to 10,000 feet high prior. The storm appeared to be around 50 miles wide in some areas, KSAZ-TV reported. The dust storm originated in Tucson, and was a part of Arizona's monsoon season. According to CNN, the dust storm prompted the Federal Aviation Administration to issue a ground stop on flights at Phoenix's Sky Harbor Airport for about an hour and 15 minutes. At it's peak, the storm left 10,000 customers without power, Jenna Shaver of the Arizona Public Service told CNN."

As expected, last week's manufacturing ISM was a contrived, one time surge. June's Services ISM just printed at 53.3, down from 54.6 in May, and missing expectations of 53.7. As a reminder for the US, which is a 70% service economy, this number is far more indicative of the true direction of the economy. Among the components, there was a decline in the New Orders, Prices, Backlogs, Imports and, huh, Inventories? Yes, the same inventories that accounted for 66% of the Manufacturing ISM surge are dropping here. Of the 17 non-manufacturing industries reporting all reported growth, except for the all too critical Financial & Insurance and the completely irrelevant Health Care & Social Assistance. Oh yes, all commodities except for diesel and gasoline were reported up in price. And now that WTI is almost back to $100, that's about to end shortly. Some deflation. And now, talk of a triple dip recession may resume.

It was only yesterday when we observed that the story of GM's relentless channel stuffing has now gone mainstream. Sure enough, a few hours later, here is Morgan Stanley with a stick save so pathetic it does not even deserve commentary.

The much ridiculed "MLEC-type" bailout proposal of Greece, which contemplates the rolling of existing debt into a guaranteed SPV, and which was the European rescue deux ex machina for exactly two weeks, appears to have been pulled off the table, following the announcement by German Deputy Finance Minister Joerg Asmussen to Reuters Insider TV that "Germany has put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens." More: "The model put forward by some French banks is still a good base for discussions and we are currently working on this. But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default -- that means a rating event -- we can also put other options like a bond exchange on the table." he said, adding discussions would take place over the summer break. Translation: back to square minus one. And actually it is much worse, because if Asmussen is aware of rating agency policy, a debt exchange would most certainly qualify for an event of default. Which confirms our initial expectation from a month ago that there is nothing absent a complete loss of ECB credibility that can possibly transpire next, as the ECB realizes there is no way around accepting defaulted Greek bonds as collateral. The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.

A few days ago, Erste Bank shared the following spot on description of gold's function in the modern monetary system: "The possession of gold is tantamount to pure ownership without liabilities. This also explains why it does not pay any ongoing interest: it does not contain any counterpart risk. Along with the International Exchange and the Chicago Mercantile Exchange, JPMorgan now also accepts gold as collateral. The European Commission for Economic and Monetary Affairs has also decided to accept the gold reserves of its member states as additionally lodged collateral. We also regard the most recent initiatives in Utah and in numerous other States as well as in Malaysia, and the planned remonaterisation of silver in Mexico as a clear sign of the times. The foundation of a return to “sound money” seems to have been laid." Today, we get a quick reminder of this all too often forgotten truth, after gold has surged by one percent in the span of an hour as the world once again realizes that the best the ECB Titanic (and shortly thereafter, the Fed) can hope for is merely to delay, not prevent, the sinking of the broken monetary system. Furthermore, that this is happening even as China hiked rates for the 3rd time this year may indicate the inflection point in gold has now come and the take out of nominal highs, just $30 higher, is next.

In today's edition of Bloomberg Brief, the firm's economist Richard Yamarone looks at one of the more unpleasant consequences of Federal monetary policy: the increasing schism in wealth distribution between the wealthiest percentile and everyone else. While the Fed's third mandate is by now all too clear: push the Russell 2000 to the highest possible level, one can now suggest that the 4th mandate is one that would make Robin Hood spin in his grave: "To the extent that Federal Reserve policy is driving equity prices higher, it is also likely widening the gap between the haves and the have-nots....The disparity between the net worth of those on the top rung of the income ladder and those on lower rungs has been growing. According to the latest data from the Federal Reserve’s Survey of Consumer Finances, the total wealth of the top 10 percent income bracket is larger in 2009 than it was in 1995. Those further down have on average barely made any gains. It is likely that data for 2010 and 2011 will reveal an even higher percentage going to the top earners, given recent increases in stocks." Alas, this is nothing new, and merely confirms speculation that the Fed is arguably the most efficient wealth redistibution, or rather focusing, mechanism available to the status quo. This is best summarized in the chart below comparing net worth by income distribution for various percentiles among the population, based on the Fed's own data. In short: the richest 20% have gotten richer in the past 14 years, entirely at the expense of everyone else.