Archive - Jul 2011

The epic revision in the just revised Boehner plan is to cut a grand total of ... $91.7 billion per year for 10 years (back-end loaded of course: 2012 will see just $22 billion in cuts - can't have any real cuts too early or else). The spin is that this is sufficient because the $917 billion in cuts is more than the proposed $900 billion debt ceiling hike, so all shall be well. Of course that is only part one of the two-part debt ceiling hike process. The next step is a $1.8 trillion cut to "protect programs like Medicare and Social Security from bankruptcy."  The problem is that Boehner continues along the path of a two-step debt hike, a formulation that Obama will never agree to, since it effectively guarantees him no-reelection chance, as the last thing the people will want is the same bickering as we are experiencing every day again some time in 2012, when the current $900 billion in incremental debt capacity runs out. And actually, with the US debt already $300 billion below trendline and with the government's two pension funds already plundered by a like amount (which means they have a net IOU position), it means that the Boehner plan really buys only $600 billion of dry powder. At a burn rate of $150 billion a month, this means the first step of the Boehner plan buys precisely 4 months before the debt ceiling has to be raised again! Oh yes, this plan also guarantees at least a one notch downgrade to the US debt, with more notches coming up before the end of the year when this whole farce is repeated.

Yo, we up in the Fed and we living in style
Spending lots of money while we sipping crystal
still making it rain and yeah it be so pleasing
wait, not making it rain-- we be "Quantitative Easing!"

QE1, QE2 QE4, QE3 Dropping IOU's
in every fund that I see
printing the cash inflating the monies
callin up China "a-yo we straight out of 20's!"

in the club we be louding out
while to the market, yeah we be crowding out
on the beach getting tan and sipping Corona
we got a monetary plan-- and it involves a lot of toner...

Contrary to calculations performed by Barclays and other analysts (including Stone McCarthy first presented on Zero Hedge), which speculated that the Treasury would have enough cash to last it through August 15th due to an increase in tax receipt, the White House's press secretary Jay Carney said that the Treasury will be "running on fumes" if the debt ceiling is not raised by August 2, naturally adding the traditional doomsday phrase that it is a "crisis situation." He had also added previously that tax revenues are not coming at an accelerated pace and that the cash will not last longer than Tim Geithner's original forecast of August 2. As the chart below shows the Treasury had $75 billion in cash as of last night, and will raise another $55 billion in net cash over upon settlement of this week's auctions. In other words, Geithner now predicts that the pro forma cash of $130 billion will last the US just one week. Well, at least we can see what the source of all the problems is.

The great cold lie at the heart of present-day America is that the nation will magically benefit if we each single-mindedly pursue our self-interest to the exclusion of all else. The idea has a sleek quasi-free-market sheen, as it borrows the market's "invisible hand" and applies it to social, fiscal and environmental policies. That is a magical-thinking fantasy. If I pursued only my own self-interest, I would dump the toxic effluent from my factory right into the river ( a la China's very laissez faire economy) while I lived far away in an exclusive community far from the stench and poisons. Why pay for costly remediation when the "free" river beckons? After all, it all works out wonderfully if we each pursue our own self-interest with methodical, nay maniacal, single-mindedness. (Recall that rivers in America caught fire in the 1960s, before environmental regulations limited corporate self-interest.) "The good of the nation" is now a code-phrase for "good for me, and to heck with the country at large." Every self-serving fiefdom, every self-serving cartel and every self-serving constituency (a.k.a. special interest) claims that its pathetically obvious self-serving lobbying "serves the national interest." It's all lies, blatant emotional manipulation of the vilest, crassest sort. Yet we as a nation have sunk so low that the entire notion of a national interest which doesn't benefit a powerful lobby or constituency has been lost. We are now a nation of self-interested pygmies, blind to any national interest that isn't devoted to enriching us personally.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/07/11

It appears someone rather big just couldn't wait until the debt ceiling resolution was found, and instead decided that defection is the better part of a ponzified game theory. As such, just after the last second of trading, they dumped about $3 billion worth in ES. In the last tick, or just after, over 65k contracts of ES were sold at $50k per. Obama better find a resolution tomorrow or this dumpathon will be a humble appetizer of what is coming up.

Yes, SkyNet, we are watching you. And an odd correlation: every time a resistance level is breached, the computers go apeshit. Truly odd how this happens everytime computers try to outrun each other.

ATTENTION: BANZAI7 LEVEL 8 NO BEVERAGE WARNING!

Anyone who had hoped that the algobots, so good at creating an almost daily levitation rally, at 3 pm would save the day will have to wait. The volume of today's selliff is starting to provide unmanageable even for the HFT crew to stand against. The 1300 support level in the ES was just taken out. And a quick look at packet churning courtesy of Nanex into the last several minutes shows that we may soon get a perfect storm replica of what happened on May 6: all that needs to happen is for quote stuffing to surge and liquidity to disappear and the pogrom will be complete. At least the fund managers (the same ones who relied on S&P and Moody's for so many years to make their investment decision for them), are once again putting their money into Treasurys. You know, the first security to be impacted when the US defaults...

As Bloomberg reports, the spread between the July 28 and the August 4 T-Bills, two instruments that mature within a week of each other, and which differ by absolutely nothing else, has just surged to the widest ever, as investors are happy to roll away from long maturity instruments (even if longer maturity in this case means one week down the road) and dump securities that mature after the debt ceiling deadline for fear they will not get repaid. As for what is happening with the August 25 Bill, see second chart below. Yes: the market is starting to price in the unmentionable.

Jeff Clark of Casey Research has created a wonderful historical "art" album which addresses the number one question which most people living in the US right now are unable to fathom: how can one's currency go from X to 0. It is impossible. It certainly can not happen to the dollar. Right? Well, as Jeff says: "History has a message for us: No fiat currency has lasted forever. Eventually, they all fail. You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price." We may add one other thing: no country in the history of the world has imploded from hyperdeflation. Not one. At the point where the debt load was insurmountable and not enough cash flow was being generated to sustain it, the authorities would always find a way to step in and be the terminal source of dilutive fiat demand: from ancient Rome, to Weimar, to the collapse of the Soviet Block, to, inevitably, the unwind of the failed (neo) Keynesian model, where we are right about now. Sure, we can all come up with goalseeked theories that validate our perspective but they are all meaningless at the end. Past a given threshold debt money ceases to function as backed by the full "faith and credit" of the backstopper and is nothing but paper. Yes. Even the abstract concept of so-called "reserve" currencies. Quote Clark: "As you scroll through the currencies below, you’ll see some long-ago casualties. What’s shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you’ve been born." There are many more where these came from. Thousands in fact. Which brings us to the title of this post. What are all these images, which is really all they are now - fancy paperweights (no pun intended) from near and far history, worth now? Precisely.

The Fed's most irrelevant report, the Beige Book, is out. Here is the gist

• Fed Beige Book Says U.S. Economy Slowed in Eight of 12 Regions
• Droughts, flooding adversely affected seven regions
• Wage pressures ‘subdued,’’ inflation pressures ‘‘weakened”
• Spending in majority of regions saw modest growth of nonauto retail sales
• Inventories still lean due to Japanese supply chain disruptions.
• Manufacturing was steady or slowed in many regions
• Most of residential real estate market still weak

We get it: it's all the weather and Japan's fault. Also, somehow Japan is to blame for "lean" inventories which somehow have increased for 2 years running.

There’s one question that I’ve been seeing over and over for the last several weeks as the price of gold has taken out its all-time highs and continued a nearly uninterrupted ascent: Should I buy gold now? It’s understandable, especially for people who don’t own precious metals yet. Nobody wants to be the sucker who buys gold at the top, only to watch it crater back to $1200 or below. But here’s some food for thought...

SSDD in the just completed 5 Year $35 billion auction. With the When Issued trading at 1.565% into the pricing, the auction came at 1.58%, confirming there was some serious lack of understanding into the close. The Bid To Cover was 2.62, a modest jump from June's 2.59, but still on par among the lowest BTCs in the last year. The ugliness behind the headlines was once again concentrated, with directs surging to the highest since November at 14.6%, obviously an artifact of the end of QE2 as "someone" has to pick up the slack. Indirects dropped to 36.6%, well below the average LTM 41.3% in the past year. Dealers were left on the hook with 48.8% of the take down. Altogether this was a very ugly auction which spooked the bond market, which received another punch in the face after the Treasury admitted that despite rosy estimates by Barclays and others it has not seen a surge in tax receipts (thank you unemployment) and will not have enough cash to last it through August 15 (at which point all the case runs out period).

We view the proposed restructuring as one that would amount to a "distressed exchange" under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full.  While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest. Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.