Archive - Aug 2011

Nothing like a perfectly calm, stable and non-imploding global Keynesian Ponzi to set investors minds at ease... And gold to all time record highs.

But at least the vacuum tube mindless buying into the close prevented 9 straight down days. We hope they managed to dump to Citadel aka the New York Fed in the last print or else a few more math Ph.D's will be joining next week's Initial Claims ranks.

As we predicted last week when we reported that the surprise 398K claims beat was "quite amusing as next week's upward revision will mean the 400k+ streak will continue", we were again correct: today's print of 400K (which will be revised to 404K or so next week) allegedly beat expectations modestly, but the kicker is that last week's 398K was pushed up to 401K, meaning that the unbroken streak of 400K+ prints is now at 18 weeks. Welcome to the depression. Continuing claims came in worse than expected at 3,730K on consensus of 3,700K, from an upward (of course) revised 3,703K to 3,720K. In other words, whatever happens at tomorrow's NFP will happen, without any feedback either positive or negative from today's claims number. In other news, those on extended benefits and EUCs declined by 44K in the week ended July 16. The state breakdown is amusing because while there was not one state with an increase in layoffs of more than 1,000K, there were 18 states with drops of over 1,000K led by California at 23,689 due to "fewer layoffs in the service industry." Said otherwise: the jobless, homeless, marginless, stagflationary depression continues. Bring on QE3 which will seal the coffin of the once great US of A for good.

The 8:30 EDT press conference is due to start any minute. The key questions which Trichet will not answer this time around are i) whether the ECB will reactivate its secondary bond buying program or maybe even expand it and ii) why the ECB continues to sacrifice the peripheral countries courtesy of high rates just to keep so called "transitory" inflation in check. The rest will be anger-inducing mumbling and bureaucrat rhetoric.

Markets witnessed forex intervention from Japan overnight to curb the strength in JPY, which together with further monetary easing by the BoJ weighed upon the currency across the board, and observed USD/JPY to gain around 300 pips since the initial intervention. In other forex news, strength in the USD-Index weighed upon EUR/USD and GBP/USD as well as commodity-linked currencies, whereas the NZD came under further pressure after New Zealand's finance minister said that strength in NZD is a headwind for the economy. Elsewhere, European equities traded lower in early trade, however did come off their earlier lows after some analysts pointed out that the ECB may reactivate its Securities Market Programme (SMP), which also helped the Eurozone peripheral 10-year government bond yield spreads to narrow. In other news, the BoE kept its benchmark interest rate and asset purchase target unchanged at 0.50% and GBP 200bln respectively as expected, whereas the ECB left its key interest rate unchanged at 1.50% as expected. Moving into the North American open, markets look ahead to the ECB's press-conference following its rate decision to gaze into future policy-direction of the central bank. US jobless claims data is also scheduled for later in the session, whereas in fixed income there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Feb'17-Jul'18, with a purchase target of USD 2.75-3.5bln.

Japan Launches Campaign to Weaken Yen (WSJ)
ECB to protect Europe by buying bonds (Telegraph)
Silent Scream of Swiss Franc Shows Great Distortion Amid Great Moderation (Bloomberg)
Pressured by White House, Treasury Secretary Is Expected to Stay at Post (NYT)
The U.S. Economy Feels the Pull of Gravity (BusinessWeek)
ECB Sees Lenders Rush to HoardCash (FT)
Groupon’s Strikeouts Reveal an Unspoken Truth (BusinessWeek)
Americans' Spending Increases in July (Gallup)
Pentagon’s First Installment on Cutting Debt May Be $28 Billion (Bloomberg)

Just as as expected:

4 August 2011 - Monetary policy decisions

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.50%, 2.25% and 0.75% respectively.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

To who expected an imminent departure by the one most incompetent man (after Larry Summers) and tax evading man in the current economic administration (that would be Tim Geithner) of course, we have bad news. He ain't going anywhere. In other words, the foreseeable future will be foreseeable for a long time. Politico's Ben Hill reports: "Treasury Secretary Tim Geithner is under intense pressure to remain at his post through President Obama’s re-election campaign next year but still may head out the door if a confirmable replacement can be found. The White House has made it clear it does not want to lose Geithner, the president’s chief economic advisor and trusted crisis consigliere. But the Treasury secretary has said he wants to return to New York this fall where his son is entering his last year of high school. He had hoped to leave after the debt ceiling drama ended and before bruising battles over tax, entitlement and housing reform resume in earnest this fall." Sorry to disappoint Tim. Which also means that Timmy will be at his rightful place when this whole house of cards finally implodes: at the very top. Lastly, it most certainly means that those who bought MF Global's bond issuance yesterday won't have to worry about springing rates for a long, long time if ever, because something tells us the one thing that could send this country formally over the edge is another former Goldman Sachs Treasury secretary.

Those that are familiar with my writings about gold and silver for the last six years know that I have said gold was cheap at $500, $600, $700, $800, $1000 and $1,200 a troy ounce and know that I have said silver was cheap at $11, $12, $14, $16, $25, and $30 a troy ounce. Today, I will reiterate that gold is still cheap in the $1500 to $1600 range and that silver is still cheap in the $40 range because the largest movements in gold and silver prices as well as gold and silver mining stocks have still not happened and will materialize over the next four to five years.

When it comes to its opinion on the shape of the bailout, Goldman is a force to be reckoned with (as in every other endeavor, no matter how self-serving the outcome ultimately is): after all it was Goldman which first proposed expanding the EFSF and using it as a "bad bank" SPV which has the extra benefit of being off the balance sheet, and can issue more debt than virtually any financial institution in the world (see EFSF - Too Small? Too Big? Or Just Wrong?). Which is why when Goldman discusses next steps, you can be positive, this is precisely what will end up happening, and that Goldman is already well positioned to profit from whatever policy recommendations it has imposed. So without further ado, here is Dirk Schumacher's latest outlook on how to perpetuate the European status quo.

•    The ECB is expected to keep its benchmark interest rate unchanged at 1.50% as expected
•    Analysts will look to see any comments by Trichet on the use of the Securities Markets Programme (SMP)
•    Trichet may be asked on the possibility of further extensions to ECB’s 3-month LTRO

While the key topic this morning is the BOJ's intervention in the JPY, which had been selling the Japanese currency virtually all night and was rumored to be constantly on the USDJPY bid (a move which is doomed to failure just like all such previous attempt by a central planner to take on the Bernank), the primary reason why futures are largely in the red is due to yet another very weak Spanish auction which sold €3.3 billion in 2014 and 2015 bonds at the highest yield since 2000. This is despite the rumored resumption of ECB bond buying as was reported by the Telegraph previously, a development which would mean that monetization via currency devaluation has commenced indirectly in Switzerland, Japan and the Eurozone, (soon the UK) in advance of the Fed's own third QE round. As for the Spanish bond auction specifics, the Treasury was expected to sell between €2.5 and €3.5 billion, ending with an amount of €1.111 billion of 4.4% bonds due 2015, a yield of 4.984% and a 2.4 Bid To Cover, and €2.2 billion in bonds due 2014 at a just modestly lower yield of 4.813% (compared to 4.291% in July) - the Bid To Cover was also a very weak 2.14. Once again, all these results assumed the ECB would backstop futures secondary market purchases: should this be proven to be a bluff, look for Spain to follow Italy in a self-imposed bond market exile.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.

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I think it's time to go long Argentina...

The easy way out of turning to bigger, more solvent governments for bailouts has run its course.