Archive - Aug 2011

Almost as if someone is trying to kill this market... Almost.

We are currently witnessing a pattern in the stock markets that has occurred multiple times in the last century. This pattern has occurred in 1907, 1929, 1931, 1987, 2000 and 2008. And every time it ended in misery.

This the intraday chart of spot gold. Whether the surge is due to JPMorgan's outlook on 2012 GDP, to Fitch saying it does not rule out revising the US outlook to negative by the end of August, or to Gross finally admitting QE3 is possible, is irrelevant. Our work here is done.

He works hard for the money ...

Sorry Hatzius, you snooze you lose. Your position as the most anticipatory, if far-less than credible (courtesy of your horrible December 2010 call) econo-forecaster on Wall Street has just been relinquished to JPMorgan's Michael Feroli who has been eating your breakfast for the past two quarters. Feroli, who yesterday warned that NFP could come in well short of the firm's forecast 45,000 on Friday (to be followed by his colleague telling Bloomberg TV a negative print is quite possible), has just fired the first shot not at merely 2011 GDP, but 2012. As a reminder, Jamie Dimon's firm had previously expected a 2.7% rate of economic growth next year. Well, it may be time to cut that to sub-1%! Quote Feroli: "All in all, by our estimates federal fiscal policy will subtract around 1-3/4%-points from GDP growth next year. Given that GDP growth has been 1.6% over the past four quarters when fiscal policy has been much less of a drag, this doesn't bode well for next year. There are elements of uncertainty in our 1-3/4%-point drag estimate, and the largest such uncertainty is probably political, as some measure could get extended. Respecting that uncertainty, it does appear that fiscal policy poses a downside challenge to our projection for 2.7% GDP growth in 2012." That's right: Jamie Dimon is right now on the phone with Bernanke screaming at the bald Princeton historian that his chief economist anticipates sub 1% GDP in 2012 unless the Fed starts printing. And printing it shall start. Remember: FOMC - August 9. Set your calendars.

Looking at the distribution of income, comparable data from the IRS show that the top 1%, who paid 38% of the taxes, earned 20% of the income and the top 5%, who paid 59% of the taxes, earned 34% of the income.  In contrast, the bottom half earned 12.5% of the income but paid only 2.5% of the taxes.

Back on July 28, we conceived of an alternative trade to the "sell CDS" on a defaulting US as a win-win proposition, in the form of compressing the August 2/August 4 Cash Management Bill spread, which at the time was as high as 20 bps. Since a default would mean nobody would be there to collect, betting everything and the kitchen sink on a levered compression to zero in this trade would be a sure way to make money as the August 4 CMBs would mature and pay off par, or else the US would be insolvent. Specifically, we said: "the reason why this trade, with lots of leverage would be ideal, is that, as mentioned above, if the US does default, Repo desks and Prime Brokers will have much much bigger problems, and two, as we pointed out, it will imminently become "uncovered" that the Fed has a secret stash of cash, up to the amount of about half a trillion, which may easily carry the Treasury through the new year, in which case the spread will immediately collapse. Of course, we could be wrong, and everyone who plays the compression will blow up in an epic supernova that will make Boaz Weinsten's legendary basis trade annihilation seems like amateur hour." We were not wrong. And in fact, as of last check, with the August 2nd CMBs already matured, the spread is negative 1.2 bps due to the scramble into ultra near term securities courtesy of the collapse of the ponzi equity stock market left and right. To those who made money on this trade: congratulations.

The worst possible news for financials, which basically never managed to tick higher in all of 2011, is now here as the entire Treasury curve has virtually pancaked today, making sure that the perfect storm for banks is here, with nobody trading (no sales revenue), prop trading dismantled (no trading revenue), and no lending revenue soon either (2s10s heading to 0%). The closed loop will send even more money into the 10 and 30 Year, causing even more pain for banks, and so on ad inf until Bernanke relents. And you can be certain that the CEOs of the TBTFs are on the phone with the New York Fed as we speak. Luckily, the next FOMC meeting is August 9 which means the market will only have to deal with this non QE3 uncertainty for a few days. Naturally when QE3 is announced, gold will promptly leave $2000 in the rearview mirror.

Ladies and Gentlemen, presenting the Greatest Farce on Earth...

If the nation is serious about encouraging new businesses, then government has to strip away the inefficiency and bloat which inhibit growth for essentially zero payoff. Permits are important, and oversight is important; but it is merely common-sense that these functions be centralized and speeded up to foster "best practices" without stultifying new businesses. Government employees who want to do their jobs efficiently and productively would be delighted to work for a stripped down, centralized agency which was designed to approve or disapprove projects quickly, and regulate the economy like vitamins--enough for safety, but not too much, i.e. a self-serving fiefdom. It's that simple: lower the cost structure of the economy, and remove the impediments to starting new businesses and hiring workers.

Alas, this is just what the powers-that-be want. Not zonked out so much that you can’t work, but zonked out just enough that you really don’t (want to) care.

To see what the market thinks of the economic prospects for the economy look no farther than the 30 Year which just dropped below 4.00% and is trading at 3.99% right now. The market is effectively pricing in a major economic contraction, with long-end deflation now expected. Which means that Bernanke just got yet another carte blanche to proceed with the only thing  he know. And validating it is the equity market which at last check not only did not react favorably to the Senate vote, but has been fading all the news all day, and is now trading at the lows, with the S&P, Nasdaq and Dow all down more than 1% now and plunging. Next up, even as Obama prepares to talk, everyone is once again looking at an imploding Europe which will need its second bailout in a month (and third overall) shortly... or else.

Did we say debt ceiling? We meant debt target. The important thing is that the soap opera is over! Market reaction? None. And now back to your regularly scheduled economic collapse, only this time with 120% debt/GDP.

The circus has been let completely loose, with the president now expected to address the nation following the Senate vote on the debt ceiling which by implication is expected to pass without a hitch. Naturally should the Senate vote by some miracle fail, Obama may be forced to scramble as his prepared and teleprompted remarks end up being completely useless. Watch what is hopefully the very last chapter of the farce (at least for another year) live here.

Next year is gonna suck.