Archive - Oct 14, 2010 - Story

Yesterday we highlighted that US TIPS securities are trading with negative yields almost 6 years into the future. The chart below shows just how great the confusion is when it comes to estimating inflation based on a comparison between rate-based instruments and other securities, most notably stocks and commodities, which are now pricing in aggressive inflation. Yet this is nothing compared to the confusion when attempting to quantify European inflation is even worse. And lastly: Britain is now expecting inflation to not return for nearly a decade based on TIPS breakevens.

BN  *`WE WISH WE HADN'T DONE' DIVIDENDS AS ECONOMY FADED: BOFA CEO

insert riotous laughter here

Is this the gray swan? The 30 Year auction just came in at 3.852%, which in itself is not remarkable, although as the highlight on the chart below shows this was an inflection point in the high yield which for the first time came in higher than the previous auction (3.82%), and could be the critical rate rise everyone is expecting. And with the 10s30s at record highs (how is that flattener MS/BofA?) this pretty much shelves any hope for America to follow in Mexico's footsteps and issue 100 Year notes. What is most troubling is that even as all other auctions keep coming at tighter and tighter spreads, the 30 Year has decidely broken away from the pattern. And the Auction itself was ghastly: the Bid To Cover was 2.49, the lowest it has been since February, and would have been far worse had Primary Dealers not singlehandedly carried it on their shoulders. PDs took down 58.6% of the auction, the highest since May of 2009! And, as we feared, Indirects are no longer chasing for yield, but are demonstrating to the US what happens if and when America decides to go into trade and currency war mode unilaterally. At 32.4%, Indirects took down the least amount since March. If the yield on the 30 Year continues to rise, this, much more so than a failed auction, will be colored swan that Zero Hedge has long been looking for. Keep an eye on the 10s30s. If it goes parabolic here, it could get very ugly, very fast.

As people finally realize that there is no getting away from a self-imposed (or sent from above) foreclosure moratorium reality, the next question is the quantification of what the hit to banks will be. As bank stock shares are demonstrating today, it will be substantial and is already starting to be priced in. According to FBR's Paul Miller, as cited by Bloomberg, "faulty foreclosures may cost U.S. lenders $2 billion for every month that home seizures are delayed and the tab could reach $6 billion... Investigations of how banks are seizing homes may prolong foreclosures by as much as three months, at a rough cost of $1,000 per month for each property in the pipeline. The biggest firms likely need to add staff to comb through the files, costing them each $1 million a year." This is a very a modest estimate. More importantly, a separate study by SNL Financial has determined that the total amount of residential (not commercial) mortgages in foreclosure between directly serviced, and those serviced for others, for the big three banks alone (JPM, WFC, BAC) is nearly a quarter of a trillion dollars! And this number will soon surge. Keep in mind, as we disclosed yesterday, per JPM, the bank, which is a good proxy of the Big 3, keeps mortgages in the delinquent category for on average of 448 days before moving to foreclose (and 678 days in Florida and a stunning 792 days in New York). This means that banks, and especially regional banks, are about to experience the mother of all delinquency-to-foreclosure cliff events, as squatters now certainly will have no intention of ever paying down their mortgage. Which also means that the quarter trillion in foreclosed mortgages are about to explode by orders of magnitude. The hole could end up being as large as a trillion if one throws in the CMBS properties that are delinquent and in foreclosure ($61 billion in August per RealPoint). And poof, there goes the trillion dollars currently sitting in cash and doing nothing (as well as a generous helping of excess reserves) for now... but not for much longer. 

First thing yesterday, when we first highlighted that CDS in mortgage names were blowing out, even as the moronic market was all giddy on JPM's earnings beat which was really a miss, we warned "be careful trading financial stocks: JPM's earnings were actually very bad, and so far only credit has figured it out. Equities, being traded now exclusively by Fed-frontrunning retards and virus-infested robots, are a little slow." Prophetically, the equity slowness has finally caught up with reality, and BofA and Wells stocks are tumbling. Alas, fins have much more to drop, especially if and when the RMBS and CMBS markets are gutted (incidentally that CMBX III-IV AJ is looking like a screaming short right here, right now). Below is that latest CDS fin rerack - it is a bloodbath.

The reason why I think the chatter of a Plaza 2.0 is so compelling right now is because we have only two choices left. We can devalue in a disorderly and completely chaotic fashion, or we can agree to do it in a more measured and sane manner. A massive QE2 program would be the chaotic choice and would lead to total and complete monetary and economic destruction throughout the world. This is what people have been referring to as the currency wars. I actually think that Bernanke’s threat to QE2 to infinity has scared some of the emerging market leaders and central bankers straight; as it should. At this point it is in everyone’s best interest to come together and say ok, the dollar needs to be devalued but it needs to be devalued versus all major currencies more or less simultaneously. The truth of the matter is this. With commodities surging and the CRB RIND Index (the spot price for 22 sensitive basic commodities) at an all time high, the booming economies in Asia and elsewhere in the emerging world are experiencing horrific inflation that is much worse than the official statistics demonstrate and this creates an environment where currency appreciation is a necessary tool to keep prices under control. The BIG problem here is that they are wary to allow significant strengthening as long as the yuan remains static. No one wants to devalue while China sits there and does nothing. On the other hand, I believe they would all be very willing and content to allow a major appreciation versus the dollar if China comes along for the ride. - Mike Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 14/10/10

While the list of skeptics on either the efficacy or beneficial effects of a new QE2 seemed to grow by the minute, it retained enough true believers to raise the prices of lots of assets. Some compared the belief in the beneficial effects to come from QE 2 to a religious experience. Others saw it as either hypnotic or narcotic. If you have faith – it will happen. It was all about faith; after all, since the Fed had not only not begun the process, they haven’t formally confirmed that there will be a QE 2. Talk about the power of jaw-boning. - Art Cashin

The banks are screwed—again. Because of the same thing as the last time—the fucking Mortgage Backed Securities. People still haven’t figured out what this Mortgage Mess means—but I’ll tell you: If enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loan and keep their house, scott-free? Shit, that’s basically a license to halt payments right the fuck now. That’s basically a license to tell the banks to fuck off. This Mortgage Mess is a hurricane that'll make Lehman's collapse look like a spring rain. —Gonzalo Lira

Taz is once again back on the scene, sending the following letter to the US Attorney in the middle district of Florida, and to FBI Director Mueller, "asking for prosection of banks engaging in illegal activities." The particular catalyst to this action was the much discussed last week mistaken breaking in of Nancy Jacobini's home by a JPM contractor. Grayson will release the attached letter at a press conference today in front of the home of Jacobini. In the letter Tax is up to his usual verbal fireworks: "If perpetrators of perjured affidavits and other systematic criminal activity can get off simply with civil liability -or even less, an insincere bureaucratic apology- the freedom that Americans enjoy will erode quickly in the face of lawless seizure of property... Without clear property rights, and a legal system that insists on clear proof of those rights before transferring ownership by force, the economy will fall apart."

Three months ago we presented the Coto Report's 50 ugliest facts about the US economy. Today, the Economic Collapse has followed up this list with 24 facts of their own, which confirm what Zero Hedge readers know: namely that the US economy has officially entered the "Late Roman Empire" phase of its civilization. Perhaps it is not too late to reverse course yet: As Economic Collapse states: " Urgent action must be taken if things are going to be turned around. It is time to get our heads out of the sand. It is not guaranteed that the United States will always be the greatest economy in the world or that we will even continue to be prosperous. For many Americans, it will be incredibly difficult to admit that our nation has become a debt addict and an economic punching bag for the rest of the world. But if we are never willing to admit what the problems are, how are we ever going to come up with the solutions? What you are about to read below is going to absolutely shock many of you. But hopefully it will shock you enough to get you to take action. We desperately need to change course as a nation." Alas, unless the current ruling oligarchy, in which both parties are merely a front for Wall Street money, and the entire political and financial system are changed drastically, and fast, the decline will merely accelerate until there is nothing left of America's once greatness.

We highlighted the following report from St. Louis Fed's Daniel Thornton in today's Frontrunning, but it may bear repeating as it is the first written salvo in the internal Fed trench warfare over QE2. The report is no surprise: as St Louis is the bastion of Daniel Bullard, one of the biggest non-voting hawks at the Fed, a group which is increasingly getting more vocal with such others as Philly's Plosser and Dallas' Fisher, not to mention Atlanta's Hoenig, the paper titled "Would QE2 Have a Significant Effect on Economic Growth, Employment, or Inflation?" is merely an attempt by the sensible undercurrent at the Fed to distance itself from the policies enacted by the supreme madman in charge of it all. While the report says nothing notably new, it does repeat what all QE2 skeptics know all too well: "It is possible – perhaps even likely – that almost all of any increase in the supply of credit associated with QE2 simply would be held by banks as excess reserves. If so, the effect of QE2 on interest rates could be small and limited to an announcement effect – the effect associated with the FOMC’s announcement – independent of the effect of the FOMC’s actions on the credit supply." Which begs the question - why is this report coming out now? Is this the red herring to the lack of a QE2 announcement on November 3? With everyone certain monetization is imminent and inevitable, is everyone about to end up on the wrong side of the trade? And if so, just how far will the market crash, now that at least 150 S&P points worth of QE2 are priced in...

Bob Doll is not too happy with Bob Doll's investment in APOL this morning. Neither are Lee Ainslie or Chase Coleman. And Michigan Dept of Treasury which just put in $100MM in the company two quarters ago is feeling particularly stupid.

The hard news is that there is no "Plan B": the future is likely to be more chaotic than you probably think. This was the primary conclusion I came to after attending the most recent Association for the Study of Peal Oil & Gas (ASPO) in Washington DC in October, 2010. The impact of peak oil on markets, lifestyles, and even national solvency deserves our very highest attention - but, it turns out, some important players seem to be paying no attention at all.

Baton-toting police have stormed the Acropolis clashing with government workers and blocking Greece's most sacrosanct archeological site for a second day. So, aside from Waddell & Reed, what else caused the flash crash again?