Archive - 2011

The following release represents Moody's Investors Service's summary credit opinion on the United States of America and includes certain regulatory disclosures regarding its ratings. This release does not constitute any change in Moody's ratings or rating rationale for United States of America. "Despite high debt levels, the financeability of the US federal government debt remains high, in part due to the global role of the US dollar. This has been demonstrated during the course of 2011, with the yields on Treasury securities falling to near-record lows at times. Over the longer term, this role could be eroded, but Moody's sees no immediate threat to the US government's ability to continue to access financing at relatively low cost."

While 2011 is not quite over yet, we urge readers to set their alarm clocks because in 9 days, Groundhog Year is here - as of right now, there are at least 12 Eurogroup and European Council meeting scheduled in Europe for the balance of "next" year. And we use the term "next" loosely, as 2012 is a carbon copy replica of 2011, before it has even begun.

If there is one cross asset correlation that defined 2011 (and the greater part of 2010), it was that of the Euro-Dollar (EURUSD) currency pair and the S&P 500, which have correlated with near unison nearly all of the time. And yet, the stability of this correlation may be getting unglued, because as Goldman insinuated in its market roundup note from yesterday, it is "reasonable to think that the ... reflexive relationship between EURUSD and SPX...will take some time to break, but this correlation should start to fray." Why? Because, "like the FED before them, the ECB is aggressively expanding their balance sheet." Which brings us to the point of this article: much to the dismay of the armies of disgruntled bankers and investors demanding that the ECB print right now, the ECB has in fact been printing, as shown the other day. Only it has not done so in the conventional sense where it assumes an "asset" on its balance sheet while expanding a monetary liability, but indirectly through shadow conduits, such as repo and other liquidity backstops, also as shown yesterday, where no new currency actually enters the system, yet whereby the balance sheet expands just as efficiently (and in doing so, dilutes the underlying currency). It is well known that it has been our contention that in this centrally planned world the only thing that matters is the global provisioning of liquidity by the monetary authority, as the ultimate marginal determinant of Risk On behavior (and inversely Risk Off), is how much ZIRPy cash do speculators (and more importantly Prime Brokers) have at their possession (for outright and (re)hypothecated purchasing purposes). So here we would like to make a distinction: it is not so much how much cash one global monetary central planner will provide to markets, but how much the various standalone central banks will inject, in whole or in part. We contend that for 2012 the key qualifier will be "in part" with the ECB and the Fed printing (either outright or via repo) in staggered regimes, and thus the primary determinant of "risk", the EURUSD, will be the relative ratio of the two balance sheets. This can be seen on the charts below, the first of which shows just how dramatic the ECB expansion has been in the past 6 months, and the second showing the correlation between the EURUSD and the ratio of the Fed to the ECB.

It wasn't a fun week for gold. By the close on Friday, the metal was down 6.7% (based on London PM fix prices), the biggest weekly decline since September. It got downright irritating when the mainstream media seemingly rejoiced at gold's decline. Economist Nouriel Roubini poked fun at gold bugs in a Tweet. Über investor Dennis Gartman said he sold his holdings. CNBC ran an article proclaiming gold was no longer a safe-haven asset (talk about an overreaction). While the worry may have been real, let's focus on facts. Have the reasons for gold's bull market changed in any material way such that we should consider exiting? Instead of me providing an answer, ask yourself some basic questions: Is the current support for the US dollar an honest indication of its health? Are the sovereign debt problems in Europe solved? How will the US repay its $15 trillion debt load without some level of currency dilution? Is there likely to be more money printing in the future, or less? Are real interest rates positive yet? Has gold really lost its safe haven status as a result of one bad week? And one more: What is the mainstream media's record on forecasting precious metals prices?

I knew you were going to say that ...

When one hears of foreclosed real estate or its sibbling REO (real estate owned) aka repossessed property, typically visions of dilapidated shacks in Detroit, Las Vegas, or the Inland Empire come to mind. And with the average foreclosed home selling at $182,489 according to RealtyTrac, this is understandable. However, such a vision would be wildly incorrect when talking about the property located at 188 Minna St., in San Francisco, which just happens to be America's most expensive bank-owned home. As MSNBC reports, the property in question is quite unlike any other REO out there: because "there's the waterfall in the foyer. And the 2,500-square-foot master bedroom with a hallway just for closets. And the 22-foot glass walls that look out on San Francisco's Arts District." And while we don't know who the original owner is who happens to have walked away on this mortgage, we know which bank got stuck with it. Who else, but Bank of America. Luckily for the bank which recently tested a 4 handle stock price, this property won't be stuck on its books generating zero cash. "According to San Francisco real estate blog SocketSite.com, lender Bank of America, which picked up the deed to the 20,000-square-foot penthouse in lieu of foreclosure back in July, just sold the condo. Listed at $35 million, 188 Minna St. was purchased for an eye-popping $28 million, making it the most expensive residential sale in the city's history." To be sure, whoever bought the REO from BAC likely got a good deal on it: "the bank's asking price is half of what the original owner, developer Victor MacFarlane, was seeking for the unit back in 2008, although he did slash the price to $49 million the following year." Which also means that Bank of America was likely largely was underwater on the "half off" sale, which also means a huge writedown on the paper value of the apartment. And one wonders why Bank of America trades at fractions of its book value.

Ok folks, the circus is over, if only for a few days. Go home.

It seems America’s bankers are tired of all the abuse. They’ve decided to speak out. True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful. But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments. Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:

“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”

Clive Hale of View From The Bridge has released his Christmas Special note. We present it to our readers solely because it contains zero financial analysis, numbers, data and what not - with the year almost over, the last thing people care about is further analysis about just how hopeless everything is when one cuts through the male cow manure. Instead, the letter is replete with precisely the kind of stuff we enjoy the most - that which makes people think.

Consider the Central Banks’ coordinated intervention to lower the cost of borrowing Dollars three weeks ago. Remember, this was a coordinated effort, not the Federal Reserve or European Central Bank acting alone.

And yet, here we are, less than one month later, and European banks have wiped out MOST if not ALL of the gains the intervention produced.

There has been a large debate as of late about the economy going into 2012.  Will it "muddle through" at a sub -2% rate, rebound sharply to more than 3% as currently estimated, or will we decline into a secondary recession?   Cases can clearly be made for all three scenarios and only time will tell who is correct.  However, this debate entirely misses the essence of what we are most concerned about - our investment portfolios and the risks to those investments from economic pressures. I have clearly made the case in past missives about the potential for a recession in 2012.   When real GDP has declined below 2% growth on a year over year basis the economy has normally been, or was about to be, in a recession.   With today's downward revision to Q3 GDP we have now had two consecutive quarters of sub-2% GDP growth.  There are only two instances in history (Q3-1956 and Q1-2007) where there were two consecutive quarters of sub-2% GDP annual growth and the economy wasn't already in a recession.  In 1956 the economy rebounded for one quarter to 2.93% annual growth in Q4, slipped to 1.88% in Q1 of 1957, rebounded once again to 2.99% growth in Q2 1957 as the recession officially started.   The other was in Q1 and Q2 of 2007 and we all know how that worked out in next couple of quarters.  These are the only instances where the economy "muddled"  along for a period of time before way to the recession.  The reality is that an economy cannot muddle along - it will either grow or contract.  "Muddling" isn't historically an option.

Over a week ago Zero Hedge broke the news that Paulson's Advantage Plus fund was down more than 50% for the year. Today, Reuters has finally confirmed what our disgruntled throat (don't disparage those who express contrarian opinions just because they refuse to brown nose) reported way back when. "There will be no holiday cheer for hedge fund manager John Paulson this month, as his dismal performance in 2011 is capped off by another miserable performance so far in December. The Paulson & Co.'s Advantage Plus fund, which has been the firm's worst performer all year, is down another 9 percent through December 16, sending yearly losses to about 52 percent, according to a person familiar with the numbers. The Paulson Advantage fund, the firm's largest portfolio, is also hurting again this month, declining about 6 percent. The fund is down about 36 percent year-to-date." Of course, those who follow us would know there was a reason for our increased derision over the past 10 days.

Even as it is ending, the fourth quarter of 2011 has been one of dramatic inversions and dislocations, the two main ones being the decoupling between corporate profits, which have for the first time in years started sagging, as ever more companies pre-announce misses or outright disappoint on the top and bottom line, while paradoxically Q4 GDP is expected to post its best quarter of the year, and print somewhere north of 3%. Which in turn has led to the other great inversion: contrary to 2010 when the US growth was lagging and investors (who still harbor the foolish atavism of believing the market reflects the economy) were told to ignore the US and focus on the rest of the world, now we are seeing the traditional reverse decoupling being blasted from every legacy media mouthpiece: namely that the US can withstand the economic crunch gripping Asia and Europe (incidentally, neither forward nor reverse decoupling has ever worked in the history of the globalized world but knock yourself out). How does one explain this paradox? Simple - as David Rosenberg shows, the payroll tax cut, with its gargantuan $10/week benefit is completely irrelevant. The far more important one is that the average price of gas has tumbled from $3.77 ten months ago to $3.29 currently: "That is practically equivalent to a $70 billion tax cut (at an annual rate) for the consumer sector, and happened right in time for the most important part of the year for retailers." The problem - the benefit is only felt while the price is declining; once it stabilized it has no incremental boost. So unless crude collapses (recall Saxo Bank's outrageous forecasts - it just might), there is no more exogenous boosting to economic growth. And if inversely gas starts rising again, then that $70 billion tax cut will become a tax hike. Long story short, the "US Economic Decoupling" is ending. Furthermore, even if tax manages to pass the payroll tax extension, it will at best not detract from growth. But it certainly will not add to it. Which is why the market which has so staunchly been ignoring what happens in Q1 2012, may want to reconsider. And with 9 days left in the year, it may want to do it soon... just in time for tax selling purposes.

In effect, students get A Mortgage with Every College Graduation (Dr. Housing Bubble, via Jed H.) with one key difference: there is no way to get out from underneath the student loans. This is the perfection of indentured servitude. How many students pay off their $100,000 loans in a mere seven years? Modern banks and corporate "higher education" diploma mills have improved the old system of indentured servitude, extending the servitude from seven years to decades. The key dynamic here is the transference of risk from the lenders, who stand to reap immense profits from these loans, to the students. This transference is enforced of course not by the banks but by their partner, the Savior State, which obliterated the right to bankruptcy for students while guaranteeing profits to the banks via Sallie Mae, another guarantor of private profits backstopped by taxpayers. The feedback between risk and return has been severed. Lenders can extend massive loans to marginal students attending for-profit colleges, knowing their losses will be backstopped while the gains are theirs to keep, and the debt-serf students are indentured for life.