October 21st, 2011
An anti Bernanke rant this AM.
Even with the Dodd-Frank financial reform, from a market perspective, there are still issues within the structure of the current banking operation that are not adequately addressed.
MBS Monetization Expectations Good For Massive 0.04% Plunge In Mortgage Spread, Sure To Unleash Refi Tsunami... Or NotSubmitted by Tyler Durden on 10/21/2011 10:07 -0400
Anyone who actually read Daniel Tarullo's speech yesterday setting the stage for a new round of MBS monetization would be forgiven to expect a major drop in mortgage rates. After all the Fed board member said, "by increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates." There is no way he can be wrong, after all he is a Fed member (although no Ph.D., instead he has an uber-valuable J.D.). And there is no way the market can not be pricing in what is now obvious. So how does the 10 Year UST- 30 Year mortgage spread look like this morning post the "pricing in" - well it is tighter. By a whopping 0.04%! Surely this epic move in spreads will be the catalyst that unleashes hundreds of billions in refinancing activity and pushes the value of the US mortgage market higher by trillions of dollars. Or not. As the second chart below demonstrates, Operation Twist, whose purpose incidentally was just what Tarullo is suggesting less than 2 months after QE3 Lite came on the scene, has now been a total disaster. As the Mortgage Brokers' Association reported on Wednesday, the MBA mortgage applications index was down 15% in the week ended Oct. 14. This was the year's biggest decline! Worse, the refi index was down a massive 17% in the week! What does this mean? Well, that we have reached a point where prevailing rates on Mortgages have absolutely no impact on either refis or home prices at this point: anyone who could have refied, has already done so, probably many times over. Everyone else is simply not eligible. But yes, MBS monetization will sure help... all those banks that have loaded up on MBS in anticipation of just this (like Bill Gross as we first speculated back on October 11) to sell them right back to the US taxpayer. And, of course, all those who have been wisely stocking up on precious metals in anticipation of just this latest episode of Fed idiocy. Remember: as we have been saying since day 1: the Fed knows only one thing. To Print. And it will. Over and over and over.
Curious what the talking heads will be discussing all weekend parallel to the joke that is the European Summit #1, not to be confused with summit #666? Here is the answer, courtesy of the FT Deutschland, where not too subtly, right next to a lede saying "the Euro rescue has turned into a farce", the publication has for the first time, set its price not in zEURo.qq but in Paul Tudor Jones' favorite currency: the Deutsche Mark, or 4.11 DM to be precise. And courtesy of the FTD, we now know the When Issued exchange rate for the EURDEM is: 1.95, the same as was locked at the EUR inception. Said otherwise, stick a fork in the euro, it's done.
The USD just dumped across all major pairs after the recent support in the USDJPY at 76.65 was just broken, leading to a huge plunge first in the Dollar-Yen, to a fresh post WW2 lowm and then in all other pairs. It is unclear what is driving this: probably some combination of QE3 expectations and technical trading now that the bottom has been taken out. The signal is irrelevant: it all originates at the central banks these days anyway. Expect imminent chatter of BOJ intervention to protect its exporters.
To go alongside today's best headline from Bloomberg, "Euro Leaders Begin Six-Day Marathon to Reach Agreement on Debt-Crisis Plan" which naturally begs the question whether Greece's rotund Venizelos will be part of the 144 hour run, here is our suggestion for caption contest of the day.
It is time for our first semi-surreal news of the day (full blown will be any headline out of Europe that things will be ok). Per Bloomberg, Europe is living “on borrowed time,” according to Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee. "The next time leaders meet there has to be progress on all key elements,” Bowles said at the AFME European Government Bond Conference in Brussels. Euro bonds are probably more “a medium and long-term issue” rather than an immediate solution, she said. They may be easier to implement “when better times are restored,” she said. Which is funny, because the WSJ just reported that "Europe's efforts to deliver a comprehensive plan to resolve the euro-zone debt crisis were in danger of unraveling ... as disagreement between Germany and France over virtually every point." Additionally, the only calculator in Europe's possession appears to have made it to Belgium and Spain, both of which have made loud noises demanding that the ECB play a major role in the EFSF, considering that both countries are also now virtually locked out of the debt markets and hence insolvent. But if there is one thing everyone in Europe agrees on, it is that America has to bail it out. Again from Bloomberg, "Euro region leaders must talk to the International Monetary Fund to discuss its involvement in European Financial Stability Facility operations and can’t take any decisions on the subject at an Oct. 26 summit, a German government official said in Berlin today, speaking on condition of anonymity." Sorry American taxpayers, if you thought your tax dollars would be limited to only funding US banker bonuses...you were wrong.
Stocks hit their low on October the 3rd. They bounced on announcements and beliefs that Europe finally “gets it” and will “solve” the sovereign debt crisis. The S&P hit a low of 1075 and a high of 1233 and is back to about 1220, which is still a healthy 13.5%. Yes, there is more going on than the European crisis, but clearly the belief that the problems in Europe are solved has played a big role, especially in the financials where the return is over 17%. It seems like the market has gotten ahead of itself, and these 5 charts show why.
- The main focus of the market remained on the EU leaders' summit this weekend and next Wednesday, where participants look ahead for further details on the implementation of the EFSF
- News overnight that the EU leaders are considering to increase the lending capacity of the EFSF to USD 1.3trl boosted risk-appetite
- Fitch managing director, Riley, said that the rating agency has no plans to downgrade France, and the upcoming EU summit outcome is unlikely to trigger review of the Italian and Spanish ratings
- ECB's Nowotny said that the ECB discussed cutting interest rate in its last meeting. Also, IFO’s economist Abberger said that the ECB will likely cut interest rate towards 1%, however the timeframe is unclear
- According to German government sources, Eurozone members could tap IMF credit lines without the EFSF involvement
Gold prices are mixed today as markets remain on edge due to increasing divisions amongst European leaders on how to solve the intractable Eurozone debt crisis. There continues to be very strong demand for physical bullion globally and support is strong at the $1,600 level due to this demand. The sharp fall of copper yesterday, by 6%, is an indication that the US, Chinese and indeed global economy is very fragile and may soon begin to contract. Physical demand in Asia, mainly India and China, has entered the traditional peak season with Indian festivals and the increasingly important Chinese New Year. This is reflected in premiums in Asia which remain good. There are reports of massive physical buying out of China on gold’s fall close to $1,600 yesterday. The most active Shanghai gold futures traded at a premium of more than $10 over spot prices earlier today. The contract stood at 335.22 yuan a gram, or $1,634 an ounce, at a premium of $3.
- France Likely to Lose Top Rating: S&P (Bloomberg)
- BNP urges EFSF to issue credit default swaps (FT)
- China municipalities to issue bonds (FT)
- Europe forced into second summit (FT)
- EU Said to Consider Wielding $1.3 Trillion to Break Impasse (Bloomberg)
- Hilsenrath: Fed Is Poised for More Easing (Hilsenrath)
- Fed debate about more easing heats up (Reuters)
- Obama Nominates Former Fed President Hoenig for FDIC Vice Chair (Bloomberg)
- ECB Said to Weigh Bigger Loans for More Collateral Disclosure (Bloomberg)
- Banks face penalties in return for bail-outs (FT)
Following a report overnight from the WSJ that S&P would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession, which many economists say is likely, the entire overnight session was dominated by yet another period of fear and loathing out of Europe, further pressured by escalating uncertainty over EU summit after another meeting is called for Oct. 26. The headline scanning brigade will focus on Belgium where at 2 pm local time EU finance ministers will meet in to hammer out groundwork for the Oct. 23 EU summit. The result of concerns that absolutely nothing is resolved led to spreads for everything blowing out: at one point, France 10-yr Yield was up +6 bps to 3.21% (the widest spread over bunds at 119.01 since 1992), Italy 10-yr yield rose +3 bps to 6.05%, highest since Aug. 5, and the spread over bunds widens to euro-era record of 402 bps or most since 1996 and lastly the 10-yr Spain spread over bunds was +4 bps wider to 5.57%, with the Bund spread at 355, just tight of the August record of 398 bps. Still this was enough for the ECB to intervene and as the chart below shows, to purchase Italian BTPs en masse for the fourth day in a row, this time with a sizable amount, even as it is now confirmed that ECB interventions hav a several hour half life. And since the EURUSD and thus futures are now driven off the BTP price, everything rose when at 4 am Eastern the ECB began its daily intervention. Alas, at this point even 8 year olds realize that these are short-term liquidity measures while the long-term solvency problem is merely getting worse.
With MSM reporting the seasonally adjusted first time unemployment claims down by 6,000, it's time for a reminder that this number is fake.