Archive - Sep 20, 2011

That Tim Geithner is either incomponent or a pathological liar is by now irrelevant: anything that comes out of his mouth traditionally ends up being completely wrong, either on purpose or otherwise. What is always entertaining is putting Tiny Tim through a lie detector test of some sort, which is what the good former spies from Behavioral Intelligence Research (for previous iterations of their work see here) done with their just released report "Tim Geithner at II/Delivering Alpha Conference." Which is why, while hardly telling us anything new, BIA's "body language" interpretation of what was said, and unsaid, is quite interesting now that the Treasury Secretary has decided to put upon himself to become more cryptic than the maestro and less credible than Baron Munchausen. To wit: "[Geithner's] responses to questions on the U.S. economy frequently reflect efforts to aggressively garner bipartisan support. From a behavioral perspective, however, his responses to questions about the European crisis are more significant. Mr. Geithner is asked a number of questions aimed at gaining insight into the situation and how the crisis will impact the United States. However, he consistently sidesteps specific questions and attempts to minimize the severity of certain factors suggesting he has more significant concerns than he implies about the depth of the risk in the region and the potential impact it has for the U.S. Below are our observations."

Turning a minor incident like Greek debt into a World-shaking economic crisis is BRILLIANT! 

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the "Twist" is already guaranteed, as is an IOER cut, per Goldman's "predictions" and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman's hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of "credit money." Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke's choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America's TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama's second term goodbye.

Folks, if a coordinated intervention on the part of FIVE central banks can’t even give us one week of gains in the European banks… nor lower the cost of Dollar swaps… then we’re in the absolute END GAME for central bank intervention.

The European Union failed to approve a law or plan to bank naked shorts on sovereign CDS.  Their focus on CDS trading started over 18 months ago when the Greek Finance Minister said that all the short sellers would lose their shirts. There have been a multitude of rumors that it would be banned, but there are many better ways to control the CDS market. In all likelihood, the politicians will remain intent on banning CDS.  I think they will be disappointed with the impact and realize that CDS is not the root of all evil and Europe will still have a sovereign debt crisis, without the benefit now of some short covering and additional price discovery.

The weird and wonderful world of options markets and models can sometimes provide useful insights on a reflexive/contrarian basis if we know where to look. Everyone is used to reading/hearing about VIX (Pisani's Fear Index) which tracks a near-the-money relatively short-dated implied volatility (note upside and downside volatility not just downside - though volatility and price do tend to co-depend quite highly). There are many other 'implied' distributional measures one can glean from the broad array of liquid options prices. When all of these indications are at extremes, there is little chance of an extended downside move since broad swathes of investors are hedged and hence not feeling all the pain - however, with current levels having normalized modestly, any downside shock (no QE3 for example) could easily be exaggerated by unhedged forced selling.

As was already discussed last week, the number of Americans living in poverty is now at an all time high, even as the real income of the average American male worker adjusted for inflation is back to 1968 levels. But that is only the beginning. ProPublica has compiled an exhaustive bulletin summarizing the sad state of America's depressionary reality in "Our Sputtering Economy by the Numbers: Poverty Edition." For anyone wondering how we are doing now compared to "before", this is the only list needed. The results are not pretty and confirm that Bernanke is now trapped in a corner, where every incremental attempt to reflate the stock market will make ever more people on the other side of the social spectrum even poorer until finally the Arab Spring makes its lone overdue appearance in America.

Earlier this month, some economic luminaries in the United States Congress introduced a new bill, H.R. 2835. The bill intends to “establish a joint select committee of Congress to report findings and propose legislation to restore the Nation’s workforce to full employment…” Great idea, fellas. After failing to ignore your way out of recession, spend your way out of recession, lie your way out of recession, and print your way out of recession, you now intend to legislate your way out of recession. This bill exemplifies how completely clueless the leadership is, and highlights the common demeanor of the political class.  By definition, people are in government because they believe that government is the solution, not the problem. Legislating your way to full employment is as fantastical as prancing unicorns and the Tooth Fairy. It’s impossible. The only employment created by legislation are government jobs to staff all those new agencies and bureaus. And naturally, those jobs must come with some task, some responsibility.

Shrugging off Italy's rating downgrade (somewhat expected but continued negative outlook), funding stress in Europe (Libor levitating and Swiss/French banks divergent), cuts in global growth expectations (IMF and World Bank), concerns over systemic risk contagion (ESRB and World Bank), and escalating rhetoric in Sino-US trade wars, US equities have managed to reach up to Friday's highs as rumors of AAPL being added to the Dow seemed enough for hapless traders. But, like a broken record, we note that the new highs in ES are being accompanied by new lows in 2s10s30s, near day's low yields in TSYs, day's highs in gold and silver, and multi-day lows in copper - all seems to make perfect sense...

Where will this one end up? Possibly bad.

As expected earlier, the next domino in the European contagion cascade, has just tumbled after the local government has collapsed following loss of parliamentary confidence vote.

• SLOVENIAN GOVT LOSES PARLIAMENTARY CONFIDENCE VOTE - BBG

This means that the pan-European EFSF vote, originally scheduled to be completed by the end of this month, will likely be delayed until 2012 which means at least 4 more months of SMP bond purchases and more anger at direct ECB monetization of Peripheral debt.

Uncertainty. That has become the key word of the day, the month, and of 2011 in general. And while broad uncertainty has manifested itself most notably in the capital markets, it has a far more practical representation in labor markets, where the main reason why employers are not hiring more people, arguably the primary scourge of the Obama administration's record low approval rating, is due to corporate uncertainty about the future: about taxes, about government demanding its pound of flesh when the time comes, and about the economy in general. Ironically, as PIMCO speculates in its daily note authored by Tony Crescenzi, probably the primary driver of global uncertainty is the increasingly uncoordinated response by monetary policy authorities (read Central Banks) in which where before all had cooperated in the global game theory, now increasingly it is every printer for himself, as the default response turns to one of defection. And as everyone who has studied Game Theory knows, it is only the first defection that provides the biggest return, with each subsequent act generating far less benefits to the uncooperative actor, forcing even more uncooperative irrationality, and so on in a toxic spiral until outright belligerent action develops. For now said belligerence has begun to manifest itself in plain vanilla trade wars, such as that pointed out last night with the Chinese response to Europe's lack of response to its "bailout" overtures, and following up with the just announced complaint filed by the US against China on chicken prices. Naturally this is just the beginning. The real concern is that where trade wars end (which in turn begin when FX wars end), real ones start. When a year ago we first branded the Chairsatan as "genocidal" we were mostly joking. Perhaps it is time to reevaluate our definition, as it is far less comical under the current environment. Here is what Pimco has to say on the issue.

Eurozone Charts to keep track of.

Now that the French banks have pretty done exactly what we anticipated due to Italy and Greece who pretty much did what we anticipated, what's next?  Look towards those banking stalwarts, but don't mention the US or shhhh!!! Gemany... Oh yeah, it's too late!