Archive - Oct 6, 2010 - Story

The populist chorus for a foreclosure freeze is now approaching 100 dB. The latest to join the fray is Delaware AG Beau Biden's, whose office, according to the AP, sent letters Tuesday asking three mortgage lenders to suspend all pending foreclosures until the banks can review their policies. While not all that surprising, this latest move is slightly peculiar as Delaware is not part of the 23 "judicial" states in which GMAC, JPM and BofA have instituted a voluntary foreclosure halt (for an analysis by Barclays of why the judicial states are mostly impacted, for now, click here). Per the AP, "the letter also asks Bank of America Corp., JP Morgan Chase & Co. and Ally Financial Inc. officials to describe their foreclosure review and verification process, and provide copies of Delaware homeowner complaints about the foreclosure process, including concerns about court documents that contained inaccurate information, improper notarization or signatures to Biden's fraud and consumer protection division." Which means that as other AGs follow suit, the foreclosure halt will immediately expand from merely the 23 judicial states to all, especially since as Bloomberg just reported, "JPMorgan, Bank of America face "hydra" of foreclosure probes." We couldn't have coined a better visual if we tried.

The obvious way out of this corner is the resuscitation of the Wage Fund through allowing the spontaneous circulation of real bills that were last used in 1914. Lest anyone suggest that this feat could be accomplished under the regime of irredeemable currency, beware: real bills can only work if they mature into gold. It is unthinkable that they could mature into irredeemable paper currency. A real bill is an IOU promising to pay gold, and it offers a return to boot. An irredeemable banknote is an "IOU nothing" and it offers nothing -- an inferior instrument at best, a fraud at worst. A real bill, to be meaningful, must mature into a superior financial instrument. Otherwise it refuses to circulate. Therefore the rehabilitation of real bills assumes the simultaneous rehabilitation of the gold standard. The two go together as hand and glove. The way to return to the gold standard is for the US government to open the US Mint to gold -- as ordained by the American Constitution that has been violated by power-hungry presidents such F. D. Roosevelt and his successors, every one of whom swore to uphold it, only to turn around and trample on it. It would be an extraordinary act of statesmanship if a new president reinstated the monetary provisions of the American Constitution. - Antal Fekete

We are increasingly interested in the Currency-Focused Side meeting that has been arranged at the IMF Meeting on Friday. We note with the weakening USD and increased talk of trade wars, that the possibility of a new 'Plaza' Accord is now not out of the question. We note that at the time of the Plaza Accord the US Current Account as a %age of GDP was running at 3-3.5%. In Q2 2010 the US current account as a %age of GDP was 3.4% of GDP. Also going into the Plaza Accord, interest rates were near all time lows in most countries, a similar situation to today.

Today's POMO is over: at $2.069 billion, the operation was right in line with our expectations, coming in at a lofty 12.16 submitted to accepted ratio, as investors apparently are not too crazy about the yield perspective of the 4 2013 CUSIPs that were repruchased. However, what is far more important is that with holdings of $821.1 billion, the Fed is now officially the second largest holder of US Treasurys. Next up- China.

Today is absolutely key if the market is to turn anytime soon. Let me first summarize the global macro economic picture before we get into technical considerations. The economic cycle has turned as the effects of stimulus wane and the boost of inventory rebuilding abates. Regarding inventories in fact the expected contribution to GDP is expected to be negative in the next 2/3 quarters and Mr. Ore who runs ISM said that if recent inventory building was not fully voluntary we might have a very serious problem. ISM has rolled in the US, following Japan and Australia where it last printed 47. Sovereign credit spreads are hovering around the recent highs they made in peripheral Europe were default is pretty much a given at this point. Central banks are pretty much all with the notable exception of the ECB (which hiked in June 2008... no further questions your honor) intervening in the FX markets or launching additional/fresh quantitative easing programs in a devaluation race as demand is insufficient and exporters fight for a competitive advantage. Congress is voting laws to tax Chinese imports, and public relations between Japan and China are at rock bottom. Recently the entire mortgage foreclosure process in the US has come to a halt as it has come to light that most foreclosures were not backed by any documentation of ownership of the mortgage loans. There are talks about a potential moratorium on foreclosures. US states' CSD keep trading very wide and default is almost a given for a few states, including Illinois or California. - Nic Lenoir

With the SEC hoping to promptly bury its disgraced "findings" on the Flash Crash, and move on to greater and more memorable crashes, it is no surprise that it will be years before anyone hears back from Mary Schapiro's porn addicts on their policy "recommendations" vis-a-vis fixing the second derivative of the Fed's POMO actions known as the market. We can promise the SEC much more will soon be heard on the topic of Waddell & Reed's involvement, but for the time being, courtesy of Nanex, we would like to provide all those who refuse to buy the SEC's scapegoating campaign of W&R's "sell algo" with definitive confirmation of just how little impact this evil, rogue "sell algo" had on the overall market in one pretty visual.

July foodstamp has just climbed to a new all time high. According to the Supplemental Nutrition Assistance Program (SNAP) at the Food and Nutrion Service, July foodstamp usage rose 1.4% from June, hitting a new record of 41.8 million, and 17.5% higher than the 35.6 million on assistance from a year ago. Participation has set records for 20 straight months. And it gets worse: as per BusinessWeek: "An average of 43.3 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates." Somehow we get the feeling these almost 42 million people will have little to no use of discount window or excess liquidity usage once gas hits $10 a gallon, nor will Dow 11,000, 12,000, or even 36,000 do all that much to shorten the soup kitchen lines.

With today being yet another POMO day, it is only fitting to do the definitive summary of how the Fed's Open Markets Group distorts various asset classes with its liquidity ramps. So all those who doubt thet Fed has an impact on stocks, please look at the chart below. Incidentally, today is the day the Fed will likely overtake Japan as the second largest holder of US Treasurys. Recall that Japanese holdings of US paper were $821 billion as of July. Well, as of September 30, the Fed held $811.7 billion in Treasurys, and in the days following, there were two POMOs: one for $5.2 billion and one for $2.2 billion, bringing its total to $819.1 billion. Which means that if today's POMO operation, which launches imminently, is larger than $2 billion, the Fed will become the second largest holder of US paper in the world. And it won't stop there: China is merely $25 billion away. At a run rate of $10 billion in POMO purchases per week, the Fed will be the largest holder of US Treasuries in the world before the midterm elections.

The IMF's latest growth forecast, which will be continuously revised until it finally gets it right and sees a decline in world growth (sorry, boys, and Jim O'Neill, decoupling does. not. work) has the US growing at 2.6% and 2.7% in 2010 and 2011, revised down by -0.7% and -0.6% respectively, from the prior overly bullish estimates, which we ridiculed at the time as well. Hereby, we ridicule these estimates as well: US GDP in 2011 will be flat to down. Period. And instead of wrong speculation, here are some wrong, hard facts: " More than 210 million people across the globe may be unemployed, an
increase of more than 30 million since 2007. Three-fourths of the
increase has occurred in advanced economies, the IMF said." And now we understand why the I in BRIC stands for IMF: "The world economic recovery is proceeding,” IMF Chief Economist Olivier
Blanchard told a press conference. “But it is an unbalanced recovery,
sluggish in advanced countries, much stronger in emerging and developing
countries." In other words, same old strawman song and dance.

Goldman's FX team, which is by far the best contrary indicator in FX trends has just issued its revised currency outlook, which now sees the 12 month EURUSD target up from 1.38 to 1.55. Which means the pair is about to plunge. From Stolper: We are revising the majority of our FX forecasts to reflect broad Dollar depreciation. We have been emphasising for some time that structural US imbalances are the main reason for USD weakness and this remains our key theme. In the near term, a number of factors could still provide a boost for the Dollar, but these no longer form the base case for our 3-month forecasts. Instead, we expect the USD TWI to decline gradually from current levels, by about 4.7%, over the next 12 months and to get quite close to historical lows. Importantly, with USD weakness shared globally, the trade-weighted impact for other currencies would likely be relatively muted. Most other countries would experience relatively little appreciation. For example, the EUR TWI would only appreciate by about 3.9% from current levels, although we project EUR/$ at 1.55 in 12 months. Asia will play an important role and we now expect trade-weighted appreciation in key countries, such as China and Korea." The simple take home: buy the dollar.

• It's Time for a 21st Century Gold Standard (Fox)
• Foreclosure Furor Rises; Many Call for a Freeze (NYT)
• IMF chief warns on exchange rate wars  (FT)
• IMF Cuts U.S. Growth Estimates as Consumer Spending Languishes (Bloomberg)
• As predicted on these pages about 2 weeks before everyone else, Wall Street downbeat on bank earnings (FT)
• The Recipe for Collapse (Of Two Minds)
• U.S. praises Japan PM over China row, stresses ties, (Reuters) and picks wrong side of conflict
• Retailers' Holiday Hinges on Discounts (WSJ)
• Whitney Falters in Trying to Repeat Success of Citigroup Call (Bloomberg)

ADP printed at a massive miss of -39K compared to a median consensus of +20K (range of -44K to 75K) . And the cherry on top: the previous number was revised from -10K to +10K, for a monthly swing of a whopping 49K. Everyone hoping for one last pre-midterm NFP hurrah this Friday will be disappointed, unless the Beijinigization of US data is now complete. Of course, this means QE2 is now all but certain. Elsewhere, USDJPY drops solidly to pre-intervention territory, printing at 82.70.

The BOJ has now learned the hard way that these days $20 billion doesn't buy you much: specifically - about 20 days, and a Geoffrey Raymond painting of Ben Bernanke running naked behind the US dollar with a chainsaw and a homicidal grin. The USDJPY is now back to where it was when Shirakawa injected Y2.125 trillion, only to see the impact trickle down to nothing. Considering Monday's BOJ action did nothing to weaken the yen, it is almost certain Shirakawa will pull another $20 billion rabbit out of his hat: this time we expect the impact to last at most half as long as the last time.

A couple of readings on the jobs report following the latest weekly reading on mortgage applications, then Secretary Geithner… Of course, the only relevant thing is that the Fed will inject another $2 billion of high beta stock purchasing power via today's second consecutive POMO.

After much posturing, Fitch has finally downgraded Ireland from AA- to A+, with a negative outlook. Net result: bund spread blows out to 415, up 5bps on the day, and will likely continue blowing out. We expect the FinMin to hold another conference call with Citi to reassure everyone how nothing is fucked here, which this time will be recorded by everyone in anticipation of another "mute button malfunction." Elsewhere Irish consumer confidence has plunged from 61.4 to 52.4. The two are speculated to be related.