Archive - Aug 1, 2011

"No plan under serious consideration cuts spending in the way you and I think about it.  Instead, the "cuts" being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases.  This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.  But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.  The truth is that frightening rhetoric about default and full faith and credit of the United States is being carelessly thrown around to ram through a bigger budget than ever, in spite of stagnant revenues.  If your family's income did not change year over year, would it be wise financial management to accelerate spending so you would feel richer?  That is what our government is doing, with one side merely suggesting a different list of purchases than the other."

Kicking the can down the road ... while they trample on the Constitution ...

It was only a week ago that S&P said anything under $4 trillion in deficit cuts would be an automatic downgrade for the US. So according to the CBO's just released score of the bipartisan budget, the S&P will have to cut its rating of the US in half, since the total budget cuts will be just over 50% of what S&P demanded previously. And here's the funny part: of the $917 billion in known cuts (the other $1.2 billion is factored but not even the CBO has any clue what it will look like), a whopping 2% in cuts will take places before the Obama election. 2%! This whole charade is there only to make sure the president is reelected. Oh, and of course to make sure S&P does not downgrade the US. Which is where we get back to the fun. THE FUN. Because as it turns out, that whole $4 trillion thing.... S&P was only kidding. "It appears that the perception Standard & Poor's seemed to harbour, that the U.S. needed to find a $4trn sized package in order to keep its triple A rating, is unfounded. Two credit research reports published today point to the testimony given by S&P president Deven Sharma to the Congressional House Financial Services subcommittee on Wednesday, where he seems to believe his firm has been misquoted in media reports." There you go: to S&P $2.1 trillion (of which $1.2 trillion may never even materialize) will end up being just as good, if not better than $4 trillion. And that, ladies and gentlemen, is how a rating agency regains credibility and stuff.

Think it's all just a US debt ceiling issue? Think again. The DAX futures just flash crashed. And judging by the broad HFT stop happening all around, this is coming to the US any second. After all, gotta make sure Congress does as they are instructed.

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

Remember all those idiots who claimed that Fukushima is contained, or better yet, the drama is exaggerated? Perhaps it is time to exile them all, starting with that moron from MIT, to Fukushima where the radiation measured at the base of the main ventilation stack just hit an all time high 10 sieverts/hour. The truth likely is much uglier: this is simply the highest reading the devices are able to record. In other words, there does not exist a device that can capture the true extent of the catastrophe at Fukushima!

It's too bad the two top investigators of the robo-signing scandal were fired from his office. They may have been able to help him out in all this...

Italy undergoing a slow motion crash, with bank after bank getting halted, first Intesa, then Monte Paschi, and most recently, main bank Unicredit. The FTSEMIB is now down a whopping 5.5% from intraday highs, led by the financial sector which may or may not last the week absent another EFSF expansion as we have speculated before. Of course, should that happen, Italy becomes a liability and not a funder, meaning the proportional obligations of Germany and France will surge, just as we explained two weeks ago. And more bad news: the spread between the 10 year Italy - Bund just hit an all time wide of 349, +16 bps on the session, as Italy CDS are now trading 328, +12, and Spain is 9 bps wider to 374. Time for bailout #3, this time to rescue Italy, then Belgium and Spain, then France and the UK, until finally the Fourth Reich, in the darkness, shall bind them. 

Consumption is our god, our faith and our religion. Like a cargo cult dependent on a magical connection to prosperity, we are terrified by the prospect that our religion is based on a false god--that is, that consumption and consumption alone leads to prosperity and happiness.  Like a cargo cult that we mock in our infinite industrious superiority, we worship the equivalent of rocks painted to look like radios that we can use to "call" the gods of endless prosperity. This rock that's painted to look like a radio is called "debt," and we call upon it to magically provide us with prosperity from over the seas. This other rock that's painted to look like a radio is called "aggregate demand," and it's carefully worshipped by a special troop of voodoo-wielding witch doctors called Keynesians. We are chanting magical phrases to these rock-painted "radios," pleading for a return to easy prosperity, but nothing's happening. We fear the magic no longer works, and that possibility terrifies us so much we can't even bear to speak of this loss.

No, there is no problem with the repo markets. None whatsoever. Absolutely none. Oh, uhhh, wait a second...

There is nothing that needs to be said about this chart which compares the histogram of "expert" Wall Street predictions and the final outcome. Everyone was above the final number! All Wall Street economists should be immediately fired, and the money saved from their multi-million bonuses should be used to fund the US deficit (after all the banks they work for only exist courtesy to the US).

Earlier today we said: "the reverse decoupling thesis will be tested once again today after the July ISM is released with consensus looking for a 54.9 print, and Zero Hedge looking for number just a tad above 50." (LaVorgna was at 54.0) Unfortunately, we were correct: the July ISM plunged from 55.3 to 50.9, or yes, "a tad above 50", on expectations of 54.9. This is the lowest ISM in two years, and confirms that the Fed's viagra no longer does anything to help the soft spot. The market took it in stride and plunged to late Friday lows. So much for the latest US debt ceiling raise market euphoria. Every single subindex dropped, with only exports and imports posting an increase, although with Imports +2.5, this more than offsets the benefits from Exports rising by just 0.5. Also, New Orders, Backlogs, Customer Inventories are all sub 50. The biggest drops occurred in Prices and and Employment, confirming that not only are employment conditions deteriorating but price making ability continue to erode.The Wall Street kneejerk commentary is hilarious, with TD's Green calling it a 'Freakshow': "TD chief economist Eric Green says in client note he is “struggling to find any silver lining” in July ISM “as the underlying components were, with the exception of export orders, lower across the board."

One big question is what will we do if the data continues to deteriorate? Another stimulus package seems like it would be hard to get done given we allegedly just agreed to keep spending in check. After the latest bits of data, even the most staunch supporters of QE must have some doubts as to its effectiveness. The Bernanke Put and the Obama Put may be difficult to implement going forward. The market has relied so much on government intervention that it will be interesting to see how strong it can be if investors lose faith in the government's ability to provide a strong backstop on any bit of weakness.

Now that everybody is busy the budget and the debt limit, we are forgetting that the single clear and present danger for the US economy is still the state of U.S. housing. As the economy is slowing again, it threatens to trigger more foreclosures. In turn, this would further damage banks' balance sheets and prevent already gun-shy banks from finally loosening credit. If banks decided to hoard even more reserves, it would have disastrous consequences for economic growth and job creation. At the end of my last entry, Dan wrote that a balance sheet recession requires a policy that would implement a speedy reduction in leverage. Here is how to do it!