Archive - Jan 7, 2010 - Story

While the domestic money printing syndicate refuses to accept the glaring reality that endless money printing causes unavoidable hyperinflation (the only question being when), China has decided it is time to start closing the spigot. Bloomberg reports that, "China’s central bank began to roll back its monetary stimulus for an economy poised to become the world’s second-biggest this year, seeking to reduce the danger of asset-price inflation after a record surge in credit. The People’s Bank of China yesterday sold three-month bills at a higher interest rate for the first time in 19 weeks." Ah the benefits of a planned economy: controlling the supply and the demand at the same time. And further, being pegged to the dollar, China receives all the secondary benefits of the Chairman's endless dollar printing. Ain't life grand in Beijing...

"Computerized algorithmic market making works in any type of oscillating market, as the computer can keep flipping out of it’s longs, and covering it’s shorts. It works in a trending market, as long as there is some type of choppy trade. The problem lies, when the computer system can’t flip out of the position. Most algorithmic systems are programmed with some type of risk parameter. If this risk parameter is breached, the computer will dump it’s position and cut it’s losses. This is what may have happened in RMBS today. An algorithmic system making markets on the long side, got too long, and was unable to wiggle out of the position because of the follow-through in selling pressure. Once it was down so much in the position (the risk parameter was breached), it dumped. This simply added fuel to the fire. That is why the sudden plunge to $16 happened. If you check the chart, you will not see this, because Nasdaq busted all trades under $22. But don’t kid yourself, these trades happened, and we should be very alarmed, because it will happen again, and it may happen to the entire stock market." Dennis Dick, Stock Trading

A surreal harbinger of what may well transpire in the US some day was today's firing of the president of Argentina's Central Bank Martin Redrado by president Cristina Fernandez de Kirchner. The action followed his refusal to release reserves to the government to be used for debt service payments, as well as his refusal to resign. At least in Argentina the Central Bank is answerable to the president, instead of the other way around. The odd development follows Kirchner's enactment of a "Bicentennial Fund" which was to be funded with $6.6 billion of the $17 billion reserves, in order to make debt payments this year: the Argentine government has $13 billion in debt service payments due in 2010. One can imagine their jealously of the US, where such a situation would be met with merely a little more cash printing and a few more $40 billion 3 year auctions.

Morgan Stanley, which recently made the daring call for a 5.5% yield on the 10 year by the end of 2010, and which has recently caught the attention of many finance pundits, provides some more projections for 10 year rates not only in the US but globally. Curiously, out of all countries, Morgan Stanley only sees Japan lower by the end of 2010, with all developed countries higher, but none moving as much as the US. Furthermore, by the end of 2010, only Australia will sport a 10 year rate wider than the US, predicts MS.

Looks as if some girlfriends are getting traded in for some hotter models this week. Even as GOOG, PCLN, AMZN are getting smoked, money never leaves the market. It simply moves on to other sectors. Doesn't matter what the sector's prospects are, just as long as its "hot" and moving up.

Update: The LA Times adds that according to the suit, on the day TCW fired him, the firm found “inappropriate contraband” in his offices, “consisting of marijuana, drug paraphernalia . . . and a collection of 12 sexual devices, 34 hardcore pornographic magazines and 36 hardcore sexually explicit DVDs and videocassettes.”

Dear Valued Clients,

I am writing to inform you that today TCW filed a lawsuit against certain former members of its previous fixed income portfolio management team, as well as their new company, DoubleLine Capital Group LLC.

The charges in the complaint are serious, disturbing and specific, and confirm TCW's reasons for relieving Jeffrey Gundlach, and his colleagues Cris Santa Ana, Barbara VanEvery and Jeffrey Mayberry of their duties. There is no reason to recount these charges here, but they clearly support TCW's conclusion that members of TCW's previous fixed income portfolio management team engaged in a pattern of breaches of fiduciary duty and other unlawful activity, which threatened TCW¹s business and reputation. Specifically, and among other things, TCW learned that persons close to Mr. Gundlach, now involved with DoubleLine, systematically downloaded very large volumes of TCW proprietary information over a period of weeks before Mr.Gundlach's termination.

The most recent broker to realize that private risk does not exist as a result of global moral hazard is Deutsche Bank, which is actively promoting ta long risk/short sovereign CDS trade. That is happening as IG13 trades at its all time record tights of 77 bps. In other words, buying an index of 125 investment grade credit provides less than 1% of incremental risk return. Pretty soon the ABX trade will be buying IG. Until then, however, the only risk continues being that of sovereign balance sheet, courtesy of onboarding of virtually all private sector risk at the Central Bank and via other backstop mechanisms.

"The Fed must curtail its emergency credit and financial market support programs, raise the federal funds rate target from zero back to a more normal level, probably between 3.5 and 4.5 percent, and restore its balance sheet to pre-crisis size and configuration." Kansas City Fed President Tom Hoenig

Total Non-Seasonally adjusted insurance claims (consisting of Initial, Continuing and EUC claims) hit another record of 11,268,100. Make of this data what you will. We are confident the objective, mainstream media will find a way to spin this favorably (it can only go down from here... of course, unless it doesn't).

Do your best Mister Mister and lament with Boeing Co. as they report that customers ordered a paltry 142 commercial jets in 2009.

"We now have a financial system that is completely based on moral hazard...Crazy things happen when you have financial system like that... The conventional wisdom is you can't have back to back major financial crises. I think we're going to push that, we're going to have a look and see whether that's true. The next 12 months could really be exciting... But we are setting ourselves up for an enormous catastrophe." - Simon Johnson

Presented without commentary. Just don't call it a bubble.

The latest observation on our depressing economic reality, behind the glitzy headlines and the 3D TV screens, comes from Bloomberg's Jonathan Weil who rightfully asks "if AIG executives repeatedly claimed the stock was worthless, how do the executives, auditors, regulators, and, ultimately, the government, still have the balls to indicate the company's stock has any intrinsic value, both its publicly traded version and its book equity." Weil also joins the long list of people who wonder, just what the hell is the SEC's function in this day and age, when publicly-traded companies, many of them government backstopped, can disclose anything and everything they desire, even when such disclosure is flawed and purposefully misleading (see Bank of America and the earlier piece on a lying Tim Geithner and the very same AIG) with absolutely no repercussions. It is all really getting just far too depressing for US taxpayers to even be indignant. Maybe that has been the point all along...

Next week's Treasury auction schedule has been announced: next week will see a total of $159 billion in new gross issuance, consisting of $74 Billion in 3, 10 and 30 year Bonds, with two reopenings (10 year and 30 year).