Archive - Sep 2013

There are dates that go down in history and some will be remembered as landmark signals of changing times. Russia has the upper hand in Syria.

Despite the Fed's strongest efforts at improving its 'communication', the average American is relatvely unaware of just what it is that QE does (and is). Reuters reports that a sad 73% of respondents could not define what the crucial-to-the-market's-survival program is with 12% of respondents believing QE was a computer-assisted program that the Fed uses to manipulate the dollar...

With the FOMC set to announce the decision to taper or not taper, forward guide or not forward guide, cut thresholds or not cut thresholds, we thought a reminder of the seven reasons to delay the taper (following what BAML's Ethan Harris calls the recent "punch in the stomach for the economic recovery story") and the four crucial reasons why the Fed can't (or won't) delay the Taper.

In light of this morning's Obama-Boehner volleys, we thought a reflection on the facts was useful. The Congressional Budget Office (CBO) released its 2013 Long-Term Budget Outlook yesterday morning, and its government debt projections are dismal... But the CBO’s featured chart only tells a small part of the story. The baseline scenario happens to be bogus. Even as it shows our addiction to debt worsening, it doesn’t do justice to the severity of that addiction. (You may want to show the chart to your children. After all, they’ll be the ones who’ll have to deal with the debt we’re piling on today.)

• Expectations for Fed to begin to taper asset purchases by USD 10-15bln
• Ranges for pace of Treasury purchases: high USD 45bln, low USD 25bln
• Ranges for pace of MBS purchases: high USD 45bln, low USD 30bln
• Some see FOMC lowering unemployment threshold from current 6.5%
• Summary of Economic Projections and Press Conference from Fed Chairman Bernanke follow the announcement

Residential real estate prices surged in China in August - up 18-19% in first-tier cities - as it appears the slowing of several tightening measures earlier in the year has sparked a full-fledged recovery in the bubble-growing in the Chinese property market. As The FT reports, some investors and analysts have started to express concern about whether China’s property market is veering into dangerous bubble territory, but the government has so far taken a much more dovish line. The fact that the government juxtaposed the soaring prices in the big cities with relative stability in smaller cities merely stoked the fires of hot-money inflows as one analyst noted, "continued effort to paint a picture of still-benign housing price conditions may imply that the central government wants to deal with other issues first before making a very clear stand on the overall housing policies." Restrictions on purchases remain but it seems clear that no new tightening has given developers and investors the green light to blow the bubble even bigger.

And now the response... We're recovering nicely - but no negotiations?

*OBAMA SAYS 'WE'VE COME A LONG WAY' ON ECONOMY
*OBAMA SAYS BUDGET DEBATE MAY BE MOST CRITICAL FOR ECONOMY
*OBAMA SAYS HOUSE ENGAGED IN IDEOLOGICAL FIGHT ON BUDGET
*OBAMA SAYS RAISING DEBT CEILING IS A BASIC FUNCTION OF CONGRESS

*OBAMA: UNPRECEDENTED TO USE DEBT CEILING TO `EXTORT' PRESIDENT

Compared with Japan, the United States national debt is a mere $17 trillion or so. But if you convert that number into yen, it comes to about 1.6 quadrillion.

We laugh at children when they talk about bazillions and gazillions but a quadrillion is no laughing matter.  Measuring any currency in quadrillions brings to mind the many hyperinflations seen in the 20th and 21st centuries. For example,  the powerful and very wealthy Germany in the early 1920s and wealthy Zimbabwe, the breadbasket of Africa in 2008.

Japan's soaring national debt is already more than twice the size of its economy. 

Wondering why bond yields are blowing wider? Seems the Republicans have decided that they won't stand for anything but a defunded Obamacare, smaller deficits (well that won't help the QE), and negotiations over the Debt Ceiling...

• U.S. HOUSE MAJORITY LEADERS CANTOR SAYS FIGHT OVER DELAYING 'OBAMACARE' HEALTH REFORMS WILL CONTINUE INTO THE DEBT CEILING DEBATE
• U.S. HOUSE SPEAKER SAYS THIS YEAR WILL BE "NO DIFFERENT" FROM 2011 ATTEMPT TO LINK DEBT CEILING HIKE TO BUDGET CUTS

Today, the Italian Senate will vote at 8:30 PM whether to formally expel the 76-year old former prime minister, Sylvio Berlusconi. Concurrently, the winner of three of the six Italian elections in the past 20 days will launch a delayed nationwide address on his political future. The contents of said address are unclear however, as Reuters reports, "political sources and local media said he would not use the address to torpedo the fragile left-right governing coalition of centre-left Prime Minister Enrico Letta - at least for now - despite weeks of threats to do so."  Furthermore, as WSJ adds, citing a column in daily newspaper Il Fatto Quotidiano, Marco Travaglio noted that Mr. Berlusconi came in third in the February vote but managed to pick the head of state, the prime minister and the government program. "Given all that, it would be crazy to trigger a crisis," observed Mr. Travaglio, a longtime critic of Mr. Berlusconi. That said, and as is well-known, the media magnate is highly unpredictable and in the past has made several versions of video announcements so he can choose one only at the last minute. However, no matter the content, what is most curious is that the vote, the Berlusconi expulsion vote and nationwide address, as well as the Bernanke press conference, which is also due at 2:30pm Eastern, will all coincide.

The yield on the benchmark 10-year U.S. Treasury bond has risen by more than 84 percent from May to early September, one of the most violent and rapid increases on record. This spike has caused severe convulsions in the bond market, leading many investors to wonder how long the torment can last. But as Guggenheim's Scott Minerd notes, if history is our guide, the answer is that it may be over soon. Investors would be wise to remember that “soon” is a period of time, not a matter of degree. Minerd makes this point to be clear that while long-term interest rates still have room to increase in this historic bear market - maybe even significantly - now may be the most opportune time to purchase longer duration fixed-income securities in the past two years.

The (G)Reekovery, in which unemployment just rose to a new record high, must be so strong that the economy can easily afford another two days of lost output as virtually all public sector workers have decided to take another two day break from a grueling work schedule (one in which they used to get a week off for just using a computer) and go on strike. From WSJ: "Greek public servants began a two-day walkout Wednesday over plans to place government workers in a labor reserve that is widely seen as a step toward future layoffs. Teachers, hospital doctors and court officials, among others, participated in the walkout, leaving schools, courts and government offices closed across the country and hospitals operating on skeleton staff. On the streets of Athens, public sector unionists staged two separate demonstrations that brought about 10,000 protesters to the streets, according to police estimates."

To think it only took $3 trillion in bond and MBS purchases by the Fed and a 300% expansion in its balance sheet in five years to "push" housing starts to levels...  last seen at every recession bottom for the last five decades. The bad news: starts are already rolling over once again.

That today's housing starts and permits data disappointed once again (in the case of starts this was the 5th miss in a row) is not surprising: with Starts printing at 891K, this was a miss to "expectations" of 917K, as analyst expectations for the "recovery" begin to be repriced in the face of rising rates. There was of course spin: the prior month was revised from 896K to 883K so the mainstream media could at least present the disappointing number as an increase. This was also the biggest 5 month drop in starts since February 2011. Furthermore, when looking at the internals one thing is obvious - the main driver of the non-existent housing recovery: Wall Street (and foreign)-based, REO-to-Rent subsidized investors in rental properties are finally leaving the scene, as demand for multi-family, aka rental units, dropped from 278K annualized to 252K, a far cry from the recent highs of 356K in March and back to a level first crossed (to the upside) back in September of 2012. This is a confirmation that absent a renewed plunge in rates, the downtrend in housing units is here to stay as the marginal dollar is quickly leaving.

Even as JPMorgan seems set to put its London Whale troubles behind it with a nearly $1 billion imminent settlement, while at the same time throwing two mid-level traders at NY prosecutors and washing its hands of the whole tempest in a teapot affair, a curious snag has appeared. The CFTC, which in the past has never had a problem with promptly settling any market manipulation abuse with any bank in exchange for a small cash-greased slap on the hand, is suddenly a sticking point in JPM's ability to just walk away from the biggest prop trading Snafu in history. As WSJ reports, "the CFTC is focusing on the bank's increasingly aggressive trades made over several months early last year, when it added tens of billions of dollars to its derivatives positions—contracts tied to investment-grade corporate bonds, these people say. The CFTC is likely to use new powers granted by the Dodd-Frank law that allow it to charge firms for recklessly manipulating markets, say people familiar with the agency's thinking."