Archive - Sep 21, 2011

Wonder why the Fed's DV 01 is about to surpass $2 billion in a few short months? Because the downward sloping line below, which shows the average maturity of Fed holdings, is about to go up, up, up. And yes, that means that every 0.01% change in interest rates will mean a $2 billion capital loss for the Fed. But, oh yes, the Fed can always print money so no risk there...

DON'T read this ... this has NOT been approved by Ben Bernanke, Tim Geithner or any other branch of the government ... and it has NOTHING to do with finance, economics or business (including shifting jobs from the civillian to military sector and bankrupting the country with more than $5 trillion spent on the war on terror) ... DON'T READ THIS!!!

BOTTOM LINE: Fed "does the twist", announcing plans to sell short-term securities and buy longer-term Treasury securities through mid-2012. Though IOER remains unchanged, overall the move is more aggressive than expected given a) a relatively large share of purchases at the long end of the yield curve, b) plans to reinvest prepayments of agency debt and MBS back into agency MBS, rather than in Treasuries.

Here is the summary kneejerk response out of a panel of Wall Streeters, all of whom perfectly anticipated just this announcement. How else...

Congratulations Ben: you succeeded in getting the 30s to a near record low level (and by far the lowest for 2011) , which also means that the entire curve will soon be flat as a pancake, killing Net Interest Margin, aka curve carry for the banks, momentarily. Good bye Bank of America. Have fun riding that bear market rally with no financial leadership for the next several years.

The Fed announced Operation Twist today. Goldman got it right.

• FED SEES `SIGNIFICANT DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
• FED TO BUY TREASURIES WITH 6-YEAR TO 30-YEAR REMAINING MATURITY
  
• FED LEAVES FEDERAL FUNDS RATE TARGET AT ZERO TO 0.25 PERCENT
  
• FED SAYS PROGRAM PUTS `DOWNWARD PRESSURE' ON LONG-TERM RATES
  
• FED TO SELL TREASURIES WITH 3-YEAR OR LESS REMAINING MATURITY
  
• PLOSSER, FISHER, KOCHERLAKOTA DISSENT FROM FOMC DECISION
  
• FED REPEATS `EXCEPTIONALLY LOW' RATES THROUGH AT LEAST MID-2013
  
• FED TO BUY $400B OF LONG-TERM DEBT, SELL $400B SHORT-TERM DEBT
  
• FED EXTENDS AVERAGE MATURITIES OF SECURITIES HOLDINGS
  
• FED TO REINVEST MATURING HOUSING ASSETS IN HOUSING DEBT

Self explanatory is the title...

Just because the correlation trading known as Delta One has not had enough bad publicity, not to mention the firm known as Goldman Sachs, here comes another intersection of the two circles in the most recent Venn Diagram...

Blow up the debt, you blow up the banks. Blow up the banks, you blow up the $700tr derivatives market. Blow up the $700tr derivatives market and the world we’ve known since Bretton Woods changes forever. It’s the same thing that had Hank Paulson corralling senior members of Congress into a wood-paneled room telling them that if he doesn’t get TARP the world will end. He was wrong then and the fear-mongers in Europe are wrong now. Let the banks blow up, let the equity holders get wiped out and the debt holders take haircuts. Guess what? The sun will continue to rise. Sensible, solvent players will move in to pick up the pieces and the real business of healing a horribly broken economy can finally begin but not one second before we force real capitalism down the throats of the current crop of pseudo-capitalists running the world. We’ve had a nice run as the world’s super power. Almost 66 years at the top of the world isn’t too shabby. And no matter what happens during the next few years that would see the US knocked off its perch as sole super power, we will still be an economically important, vital member of the global community. The sooner we acknowledge that the current economic system, that we in the US sit firmly on top of, is broken and needs massive, perhaps even painful fixing, the sooner we can get back to being a great country. In the meantime, the Bernank will tell you how he plans on extending the bad system at 2:15pm. Enjoy.

On 17 September The Wall Street Journal published a fascinating article on “peak oil,” “There Will Be Oil,” written by Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, an energy research and consulting firm and deserved recipient of Pulitzer Prize for his 1991 book, The Prize: The Epic Quest for Oil, Money and Power. According to The Wall Street Journal, “There Will Be Oil” “is adapted from his new book, The Quest: Energy, Security and the Remaking of the Modern World.” The essay will doubtless have widespread influence amongst prosperous The Wall Street Journal readers, but in his glib dismissal of “peak oil” theory advocates, Yergin glosses or ignores a number of issues fundamental to the larger picture, for whatever reason, and these oversights should be considered in any evaluation of the piece and the peak oil “specter.”

Just so the Italian banks don't feel isolated and get more than their fair share of intraday limit down closes, here comes S&P, via Bloomberg:

• S&P Cuts Ratings on 15 Italian Banks After Italy Downgrade
  
• S&P cuts Intesa Sanpaolo ratings to A from A+; outlook negative
  
• S&P cuts Mediobanca ratings to A from A+; outlook negative
• UniCredit Spa Rating Outlook to Negative by S&P
• Findomestic Banca Cut to A From A+ by S&P

Judging by the market response, forget QE3: QE 3000 must be coming.

Well it seems the impending maturities of GGBs has forced the Greek's hands as they drag austerity measures into the here and now - and in dramatic manner.

*GREEK PENSION CUT FOR THOSE EARNING MORE THAN EU1,200 A MONTH

*GREECE TO REDUCE TAX-FREE THRESHOLD TO EU5,000 FROM EU8,000

*GREECE TO REDUCE PENSIONS BY 40% FOR THOSE UNDER 55

*GREECE TO CUT WAGES OF 30,000 STATE WORKERS THIS YEAR

*GREECE TO CUT PENSIONS OVER EU1,200 BY 20%: STATEMENT

UPDATE: Full Statement Attached

There goes Citi...

While most commentators proclaim that QE is a completely new phenomenon, we have in fact seen a version of it in the form of the Fed’s and Asia’s (especially China’s) purchases of US Treasuries/ currency pegs over the last decade or so.