Archive - Sep 2013

If Obama's intention with the fast and furious series of geopolitical and domestic distractions over the past three months was to sideline Edward Snowden's revelations of the biggest spying scandal since Nixon, he appears to have largely succeeded: not only has America become largely numb to every successive iteration of shockers emerging from the most important whistleblowing episode in recent US history (and in fact can't wait to get even more in debt to purchase shiny, faux-gold fingerprint scanners), but the person behind these revelations, the 30 year old Snowden himself, has largely faded into the collective subconscious. So what is the Russian asylum-seeker doing now that the fruits of his labor has been largely exposed and the US public is already eager for the next big watercooler scandal, popcorn in hand? As AFP reports, it is all but life as usual for the whistleblower: "US intelligence leaker Edward Snowden is living under guard at a secret address in Russia and sometimes emerges in disguise, although he remains in such danger that even a family visit could endanger his security, his lawyer said Monday."

"If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That's the fiscal gap," he says. "That's our true indebtedness."

A funny thing happens when the free-money liquidity-train stops calling... it seems the post-euphoric realization that a taper is inevitable (or at the least lower growth than anyone expects is likely) is wearing on those that could do no wrong until just last week... Last week's dramatic short-squeeze appears to have flushed the (forced) sellers from the market and left the market to auction down to levels at which there is a bargain to be struck... Of course, now that the "most shorted" is underperforming so strongly, there is ammo for yet another squeeze higher.

Fulla Bologna!

Following the crisis in October 2008, Iceland's government declared all deposits in domestic financial institutions were 'blanket' guaranteed - an Emergency Act that was reafrmed twice since. However, according to RUV, the finance minister is proposing to restrict this guarantee to only deposits less-than-EUR100,000. While some might see the removal of an 'emergency' measure as a positive, it is of course sadly reminiscent of the European Union "template" to haircut large depositors. This is coincidental (threatening) timing given the current stagnation of talks between Iceland bank creditors and the government over haircuts and lifting capital controls - which have restricted the outflows of around $8 billion.

The process the Fed is wrestling with is no different than that of the drug addict. After a certain point, dependency develops. Then the withdrawal process is so painful it is not willingly accepted. The drug analogy is appropriate up to a point. Here is a major problem with the analogy. The drug addict brings the outcome on himself. Those who will suffer the most for the Fed’s actions are not responsible for the pain they will endure. Regardless, the pusher has made most of us junkies. We have been forced into an economic haze that seems real but is not. Whether we know it or not, we are hooked. A great “drying-out” period lies in front of us. Few have understanding of what “economic cold turkey” means, but we will all learn.

"My daughter was raped and abducted," said a Mexican farmer.  President Obama says, "What's different in America is it's easy to get your hands on a gun."

The Germans will be getting out the beer and drinking a double dose of the amber nectar not only because MuttiMerkel as she is known (otherwise known as ‘Mother’ Angela Merkel) was reelected on Sunday 22nd September, but also because new reports issued today show that the Eurozone is doing better than expected.

In case there was any concern that the umbilical cord between US corporations and government has never been thicker (especially in light of recent revelations that the NSA views the AAPL Borg Collective as useful "zombies", abusing their credit cards just so they can be spied upon in new and improved ways) the New York Police Department is here to remind everyone of just that.

It was fun while it lasted but it seems a recognition that the Fed will have to Taper at some point sooner rather than later (for these four reasons) combined with the Washington anxiety hotting up seems to have sparked a "sell the news" event on the back of good news (China PMI, EU PMI, Merkel, AAPL). Perhaps, just perhaps, the final short overhang was wrung out inlast week's epic spike courtesy of a Fed that didn't like how consensus was in line with them. Notably, bonds are rallying in a very old-normal rotation to weak growth/safety manner and are near post-FOMC low yields. Gold remains well above its pre-FOMC lows and the USD remains well below pre-FOMC levels. In other words, US stocks have given back the most of all assets impacted by the un-Taper.

Once upon a time, US thrift institutions were the primary provider of credit to keep the American housing market humming along. Then the great Savings and Loan crisis happened, and by and large thrifts disappeared from the housing credit landscape. The result was the advent of Fannie and Freddie (i.e., the GSEs) as the "rug" that tied the US housing market room together. The chart below shows the dramatic increase in the role that the GSEs started playing following the S&L crisis, and which culminated with the great financial crisis, or rather the failure of the GSEs a month ahead of the Lehman bankruptcy.

New Revelations Are Breaking Every Day

Much attention has fallen on the Fed's recent announcement that a new fixed-rate, full-allotment overnight reverse repo facility is in the works (so much so that both shadow banking experts Singh and Stella have opined on the issue). It appears that despite the Fed's "best efforts" at communication, not enough clarity has been shed on the topic. So here is Bill Dudley's explanation.

Last week we destroyed in detail the fallacy that the plunging participation rate in the US was related to demographics. Despite Ben Bernanke's comments during his press conference last week that demographics play a role, it seems Fed's Dudley and Lockhart have a different view - in line with ours.

• *DUDLEY SAYS UNEMPLOYMENT RATE DECLINE `OVERSTATES' PROGRESS
• *LOCKHART SAYS A NUMBER OF EXPLANATIONS FOR PARTICIPATION RATE (as we covered here)
• *U.S. FED'S DUDLEY SEES 'HOLLOWING OUT' IN LABOR MARKET INCLUDING FACTORY WORKERS
• *LOCKHART: LOWER PARTICIPATION MAY MEAN LOWER ECONOMIC POTENTIAL, WHICH IS A CONCERN

What now? Instead of demographics (the aging of America fallacy), it is a 'hollowing out' of our manufacturing base and this leads to lower economic growth potential. It seems Stockman's 'born-again jobs scam' is very real.

As expected, here come the first two doves "explaining" the reasons behind Bernanke's taper surprise last week:

• DUDLEY SAYS FED MUST ACT ‘FORCEFULLY’ TO PUSH AGAINST HEADWINDS
• DUDLEY: MAY TAKE CONSIDERABLE TIME TO REACH 6.5% JOBLESS LEVEL
• DUDLEY SAYS ECONOMY STILL NEEDS `VERY ACCOMMODATIVE' POLICY

And Lockhart adds to the chorus:

• LOCKHART SAYS FED FOCUS SHOULD BE FASTER U.S. ECONOMIC GROWTH
• LOCKHART HAS BACKED FED'S ASSET PURCHASE PROGRAM
• LOCKHART SEES `SOME SLOWING' IN U.S. PAYROLL GROWTH

Translation: much more "high-quality collateral" to be extracted from the system.