Archive - Jul 17, 2012

Gold inched up on Tuesday ahead of Federal Reserve Chairman Ben Bernanke's Congressional testimony today and Wednesday which should provide the market with information as to whether the US central bank will flood the market with more US paper.

Yes, Chuck Schumer just said "Get to work, Mr. Chairman" right after saying that "The Fed is the only game in town... You have to take whatever actions are necessary to ensure a strong recovery." What he really meant is that my biggest donors demand a solid bonus for 2012. Who are these donors you may ask? Here they are.

Meet the Old Scary Clown, same as the same Old Scary Clown.

Treasuries seemed to shrug off the QE-on trade from yesterday in the lead up to this morning's big disappointment from Bernanke. Gold lost it first and then as the statement came - with no mention of hyperinflation, helicopters, or new printers - so equities dumped - gapping down to converge with the rest of risk assets. The USD rallied as its cloests relative neighbor in disaster the EUR legged lower and the USD strength exaggerated commodity weakness further (Silver and Copper worst but all falling). ES is back to the post-ramp open on cliff on Friday at the magic 1340 level but momentum is not in its favor now and Treasury yields are reverting lower now also. Financials were the early laggards and have extended losses with GS back in the red and JPM down notably.

We said to expect nothing from the Chairman today. We were right (and those "strategists" who said to look for a negative IOER announcement were dead wrong). And now, here is Goldman with its Humphrey Hawkins post-mortem.

It appears that The Bernank has followed his central banking peers around the world and passed the torch on to someone else (since perhaps he has realized his own lack of omnipotence - or more simply he knows the market has become self-aware of QE and needs to reset expectations to have any hope of a QE impact). It's not the first time he has vociferously noted the impact of the fiscal cliff but this time, based on the following word-cloud prominence of the word 'fiscal', it is front-and-center as while he did leave the door open for further policy action - he clearly checked to his congressional co-conspirators.

Ben Bernanke will deliver the semiannual report on monetary policy to the Senate Banking Committee Tuesday. The market is hoping and praying that the Chairsatan will make it rain. He won't. In fact, as explained earlier, it is likely that Ben will say absolutely nothing of significance today and in a world in which only the H.4.1 matters, this is not going to be taken well by the market. Of course, if Benny does crack and promises to push the S&P to 1450 just in time for the re-election, all bets are off.

Animal Farm rears its European head, where we learn that some bailout agreements are more subordinated than others. Bloomberg brings us the details of the just completed collateral deal between Finland and Spain, which has terms identical to that of Greece, where there was absolutely no debate about whether bailout loans were senior to public and private sector debt. Following this deal the semantics of the ESM subordination, implied or explicit, should also end.

• Collateral deal bilateral between Finland, Spain, Finnish Finance Minister Jutta Urpilainen spoke to reporters.
• Deal structured as Greek collateral was
• Other countries not asking for collateral - YET!
• Collateral to come from deposit guarantee fund
• Negative pledges mean deal can’t be directly with state

The can has been kicked. The austerity has been implemented. The revenues have fallen. And as we see in the chart below, the pace of local government distress is accelerating. As has been made so clear in the past, defaults cluster; and sure enough it is starting, as tensions between unions and city managers become irreconcilable.

While there was little surprise in today's Industrial Production report, which rose 0.4%, on expectations of a 0.3% rise, however offset by last months' revision from -0.1% to -0.2%, it was the critical Capacity Utilization data that has some analysts concerned. But first, and continuing with the theme of "housing has bottomed", it is worth noting that of all the major market groups contributing to the overall index, only Construction saw a decline in June industrial production, dropping by 0.3%, following another drop of 1.4% in May. As for Capacity Utilization, it missed expectations materially, printing at 78.9% on expectations of the first 79%+ print (post revision) in 2012. In other words, the June number is the same as February's, following full year revisions that have taken down the maximum to 78.9 reached in February and April, and now June. In yet other words, even as the US continues stocking up on record amounts of inventory month after month, the business verticals are simply unable to expand. So with Cap Utilization having plateaued, will all the excess LIFO inventory be remarked to fair value? And what happens to corporate equities when a valuation allowance is taken to finally reflect reality?

There are various reasons why not only we at Zero Hedge are big fans of Hugh Hendry. One of them of course is his uncanny ability to not only tell the truth, but to bash his competitors faces into it (as Joseph Stiglitz so vividly recalls), even if it means running squarely against the consensus. The other reason are self-aware statements such as this one via the FT today: "What I found was that when I speak in person, and especially when it’s television and timing is so acute, it gives the impression that I am cavalier and, if you will, full of myself,” says Mr Hendry, speaking by phone from his office in Bayswater, central London." Hendry was obviously discussing his self-imposed media blackout which unlike other prominent financiers is not being used for book sales promotion purposes but appears quite genuine. It also means he won't get to collect $200/appearance fees as a guest contributor on CNBC but we digress. "The danger when people look at that from a distance is that they try to align that with the guy that they’ve just given $50m or $75m to and it’s not the same person." iI is sad that none of the other talking muppet heads and "daily pundits" who appear on financial comedy TV to merely blow smoke up assorted holes and talk their books, don't share Hendry's revelations a little more often.

If Krugman is to be believed, the state of global sovereign nation balance sheets must be excellent as there are now 12 major nations with 2Y interest rates below 1.00% with 4 of those nations having joined the Negative-Interest-Rate-Policy (NIRP) club. Canada, Sweden, USA, UK, Japan, France, Austria, and Finland are all currently below 1.00%. Holland, Germany, Denmark, and Switzerland are all currently negative.

Today's June CPI came and unlike virtually every other print in the past 2 months, wasn't an abysmal miss: printing at 0.0% for the headline and 0.2% for the core, it was precisely in line with expectations. As the chart below shows, there has been one month of declining headline CPI in 2012 - and somehow this is supposed to usher in hundreds of billions in QE and/or the Fed volunteering to destroy the short-term funding market using negative IOER rates. Brilliant.

Folks, the political game has changed in the US. The Fed is no longer invulnerable. In this climate more QE cannot possibly happen. End of story. Indeed, if the Fed were to launch QE at any time between now and the election, Obama is DONE. The last possibly chance for QE without it being a clear hand-out to Obama (and a gift from the political gods to Romney) was June. The Fed passed on that.