Archive - Sep 2012

The reality is that we’re now facing a Crisis that will make 2008 look like a picnic. That Crisis will come when sovereign nations begin defaulting. The most likely candidate is Spain who refuses to ask for a bailout because it doesn’t want anyone looking too closely at its books because the entire Spanish baking system is insolvent beyond belief.

Bernanke has acquiesced - and all is well in the world:

• *FED TO KEEP POLICY STIMULATIVE FOR `CONSIDERABLE TIME'
• *FED WILL ADD TO PURCHASES IF LABOR MARKET DOESN'T IMPROVE
• *FED DOES NOT SAY WHEN MBS PURCHASE PROGRAM TO END
• *FED TO BUY $40B MBS MONTHLY, CONTINUE `OPERATION TWIST'
• *FED TO BUY MBS, EXTENDS ZERO-RATE POLICY INTO 2015

With 20 minutes to go, we thought it timely to see the script (perhaps) for the frivolity to come. It seems like the fate of the known world is predicated on the words of a bearded academic this afternoon and whether you believe he must or must not LSAP us to Dow 20,000 (and Gold $2,000) in the next few weeks - even as the economy and jobs tail-spin - there are many questions, which Goldman provides a platform for understanding, that remain unanswered (and more than likely will remain vague even after he has finished his statement). Their expectations are for a return to QE and an extension of rate guidance into mid-2015 (and everyone gets a pony) but no cut in IOER.

And so it is written; thou shalt not drink big soda upon the veritable streets of New York City. As the Village Voice reports, the NY Board of Health just passed Bloomberg's soda ban proposal banning sugary drinks in more than 16-ounce cups. Of course, none of this should come as a surprise as repression swings from financial to social - what next? No more 8-year-old chimney-sweeps? No more untested drugs on the market? Free-speech suppression on YouTube? As WSJ notes: During the first three months after the ban takes effect, the city will inspect and inform sellers when they are not in compliance with the law. The city will allow a three-month grace period before it begins issuing notice of violations that are subject to fines. Will there be soda hoarding? 'I Drink 17-ounces-at-a-time' T-Shirts?

The mood from yesterday's boring 10 year auction was carried over into today's earlier 30 year auction (not at the usual 1 PM time due to Bernanke's press conference). Moment ago Tim Geithner auctioned off another $13 billion in 30 year bonds, all of which will be promptly purchased by the Fed (as a reminder, the Fed already monetizes all monthly 10-30 year issuance courtesy of Twsit), at a yield of 2.896%, the highest since May's 3.06%. Unlike yesterday's 10 Year, the Bid To Cover rose modestly to 2.68 from 2.41, in line with the TTM average. The internals were boring as well: Directs: 12.4%, Indirects: 38.7%, Dealers: 48.9%. All quite meaningless, because as noted, all of these bonds will eventually be gobbled up by Simon Potter's open market monetization desk. And with this last auction for the week, US debt is now $16,081 billion in debt (current $16,054 billion plus this week's net new money of $27,918 billion), an increase of $80 billion in the few short days since the Democratic National Convention, when the US broke $16 trillion in debt. And rising.

Back in November 2010, the robosigning scandal hit in which it was made clear that when it comes to keeping track of mortgage titles, nobody really knows what belongs to whom, except maybe for Linda Green. The immediate result of this was a complete collapse in the foreclosure process as banks no longer had leverage to evict those who don't pay their monthly mortgage bills, since the banks couldn't confirm they actually had rights to the underlying mortgage, and the total monthly foreclosure total dropped from a ~330,000 average houses/month to roughly 250,000. Then in February, to much administration fanfare, the banks, and the attorneys general, signed what we dubbed the Robo-settlement: an event which was supposed to be the "resolution" to the robosigning scandal, and which should once again unclog the foreclosure pipeline. This did not happen. Instead, as RealtyTrac has been diligently reporting month after month, the monthly foreclosure total has continued to decline, and in August hit a level of 193,508 total foreclosures. The immediately spin is that this was a 1% improvement from July's 191,925. The reality is that it was a drop of 15.1% from a year earlier. As the chart below shows, ever since the advent of fraudclosure, the average monthly foreclosure total has dropped from a 330K/month average to just 219K. And declining. So why did the robosettlement not undo the robosigning foreclosure crunch? Simple - foreclosure stuffing.

As expected: 

• GREEK FINANCE MINISTER DENIES REPORT THAT GREECE NEEDS A THIRD BAILOUT
• COUNTRY'S POSITIONS ARE FORMULATED ONLY BY HIMSELF AND PRIME MINISTER SAMARAS

Alas, the cat is now out of the bag, and any further denials out of Greece merely bring the moment of departure closer. Not even the EURUSD algos are buying it.

You could be forgiven for believing that the ECB's talk/plans have indeed solved the European problems. The market's reaction appears to confirm all anchoring bias and thanks to overly bearish positioning (and thin summer markets) has sent all but the long-term-est bears scurrying for their rabbit-holes - as once again 'tail-risk has been removed' - just like LTRO, the SGP, and The Grand Plan before it. However, as BofAML notes in this must read note, we do not believe the ECB move will necessarily lead to a permanent stable equilibrium for the euro area for two reasons: 1) a stable equilibrium would require certainty about the ability of countries to restore debt sustainability, i.e. that they will respect an agenda of economic policy reforms and/or; 2) certainty about the ECB course of action, i.e. that the ECB will purchase bonds in such a way that we will not observe renewed financial market stress as we did this summer. Such certainty would require both Spain and Italy to put their faith in the Troika’s hands and the ECB to pre-commit in return, which seems to us very unlikey at this time. The ECB’s conditional backstop is some way from the “bazooka” that many were expecting

A funny thing happened on the way to Bernanke's wealth-creation strategy program. The unintended consequence of flooding the world with USDs, as we have pounded the table again and again on, has been 'spillover' into hard assets (or assets with relatively fixed supplies). To wit, oil prices are surging once again. Critically, as the chart below shows, each time this energy price hangover has trickled down to the consumer via $4 gas prices, it has marked a turning point in the US equity market. Of course, this time is different, but nevertheless one has to wonder how stock prices rise by any measurable amount with stagnant wage growth and price inflation in everything we buy and use (and now even the hedonically-tamped PPI is starting to show signs of instability).

Norman Bernanke: "I think I must have one of those faces you can't help believing."

Fresh out of the flashing red headline-a-tron:

• IMF OFFICIALS SAY GREECE WILL NEED A THIRD BAILOUT
• IMF SAYS GREECE CAN'T FILL FUNDING GAP ON ITS OWN, UP TO EUROZONE AND ECB TO FIND MONEY FOR GREECE
• GREECE MET ONLY 22% OF PROGRAM TARGETS FOR 2011
• EURO EXIT WOULD SET GREECE BACK BY MANY DECADES

Nobody, NOBODY, could have anticipated that fighting record debt with recorder debt, could possibly fail. And cue Germany telling Greece the party is now over, which, is what (a sliding EURUSD for those confused) it has wanted all along.

If 2011's Arab Spring was all about the propaganda "hope" of democracy (driven paradoxically by soaring global good prices as we predicted in early 2011 before the first Tunisian domino toppled), then 2012 Arab Fall, is all about the blowback to US policies and intervention in the region. And while we are amused by the media's narrative that an entire continent can suddenly come to arms against Pax Americana over a YouTube clip, we are confident that what some hate-mongering preacher has to say about Mohammed is about as relevant to what is happening in the Middle East today, as how the global economy performs impact the S&P. Absolutely none. What we do know is that the anti-American revulsion, which started on September 11 in Egypt and has since taken Libya and Yemen by storm, is spreading like wildfire. The NYT writes: 'Protests were also reported at American missions in Morocco, Sudan and Tunisia, where the police also fired tear gas to disperse crowds." It is only going to get far worse, as suddenly geopolitics, and the US response thereto, becomes the biggest issue in the presidential debate.

After almost forty years on Wall Street we understand both the joke and the punchline and you cannot pay off old debt with vastly greater amounts of new debt without consequences and, we assure you, there will be consequences. This paradigm does not work for a corporation or a sovereign nation and the borrower is eventually brought to his knees by the sheer weight of the debt that he has laden upon his back. The interest rate paid is only part of the equation with the rest being the absolute size of what is undertaken. The Euro and the equity markets rally upon misperception. It is not “unlimited” or “no cap” that are really the operative words for the scheme but the “condition” of use that is the most important part of the recent “Save the World” speech of Mario Draghi. Spain is an admitted user of “dynamic provisioning” which is a long and academic argument for shifting reserves but in the end it means but one thing and one thing only and that is they are admittedly fiddling with their books. Spain is scared to death of the “Obermeisters of the Troika,” the refrains of the three brothers Reich, that will show up in Madrid and demand explanation and sacrifice.