Archive - Oct 2010 - Story

With today's POMO focusing explicitly on the most preferred part of the curve, the 5-7 Year "Belly", we expect today's monetization concluding at 11am Eastern to be be a smashing success, with a huge Submitted to Accepted ratio, as this is precisely the part of the curve that investors have been frontrunning in advance of the Fed's repurchase activity. Failure to get a number around 10 will be cause for substantial concern.

Hopium consumption continues: expectations surge as current conditions plunge. One year inflation expectations surge from 2.2% to 2.6%. If only any fundamentals mattered any more.

Here is Jan Hatzius' initial read on Bernanke speech. In a nutshell, Hatzius seems to believe that reading between the lines may mean Bernanke will not do QE2, and preserve some of the Fed's mystique, so that all those massive bond managers who get the Fed's data early appear to have a competitive advantage. Alas, they don't. And all those who believe the Fed at this point, now that fiscal stimulus is no longer an option and all out FX war has broken out, has any other option but to buy anything not nailed down, well, we would like to point them to the 9 upcoming POMO monetizations over the next 4 weeks. What is most troubling is that the market has now priced in not only that, excluding some intraday volatility especially on OpEx days, but the expansion of Fed proxy buying of AAPL to $25 billion a week. Hatzius better hope that his attempt to restore some credibility to the Phantom of the Fed is grounded in reality. Because in the off chance he is right, buying a boatload of far OTM broad market puts on November 2 may well end up being the most profitable trade of the year, if not decade.

According to Goldman's Michael Vaknin, the positive correlation between bonds and stocks is somewhat odd, and he explains it by claiming that stocks are going up on expectations of economic growth as bonds drop in advance of the Fed's "trivial" elimination of bond supply (we will see how trivial it is when there are no Treasurys left to buy in one year). Well, he is half right: the only trade remaining is what we have been claiming since the beginning of the year - frontrunning the Fed. Which explains why the biggest lament at the Value Investor Congress ealier this week (where Maverick's Ainslie was praising Apollo Group a little prematurely) was that there is, well, no value investor left - all that is left is parsing the H.4.1, the H.3 and the H.6 Fed statements. Everything else is irrelevant. Vaknin does, however, bring up an interesting point, one which has made both Bank of America and JPM highlight the bubble in Emerging Markets: namely that the Fed is exporting low yields abroad. Which also is logical: emerging countries are hoping to offset productivity loss due to reduced exports via appreciating market values. However, as the latter is merely an artifact of Keynesian FX warfare, it simply can not last, as at the end of the day everyone focuses on transitory relative strength instead of doing what Ricardo so long ago correct predicted: each country must emphasize what it has a competitive advantage in. It appears lately the only competitive advantage that is important is who can print the most fiat the fastest. And that is a recipe for a complete wipe out.

In a direct affront to congressional scapegoaters and idiots everywhere, the EU's Junker has just hit the tape saying that not only is it wrong for the CNY to follow the USD's erratic movements, but that he does not believe the CNY is too strong. Well of course, it isn't: relative to the dollar, it is at parity. And looking at what the money printing idiot is doing it will get much weaker, which will make life for Europe an even bigger hell. Disturbingly for German exporters, Juncker said he does not expect concerted action to stop USD fall vs. EUR. Lastly, Junker notes what everyone knows - there is too much volatility between the main global currencies. This is also known as the initial phase in currency war. Just wait until India, and finally China, gets involved in devaluation. That's when it gets really "volatile." But when you have tapped all the organic growth in a failed economic system, what else can you do to avoid the hudnreds of millions of pitchforks politely demanding one's scalp.

• Bernanke Sees Case for `Further Action' With Too-Low Inflation (Bloomberg)
• Special report: Globally, the flash crash is no flash in the pan (Reuters)
• GE Falls After Sales Miss Estimates on Equipment Shipments (Bloomberg)
• Pento: Gold Vs US Bonds - Which Do You Believe? (RCM)
• U.S. to Judge China's Yuan Policy as Elections Near (Reuters)
• Stock Selloff Adds to Pressure on Banks to Fix Foreclosure Mess (Bloomberg)
• More jawboning: "Muted" effect if Fed buys more bonds: Kocherlakota (Reuters)
• Japan, Korea Tussle Over Won (WSJ)

Economic data barrage update:

• CPI up 0.1% on expectations of 0.2%, previous 0.3%; Ex-food and energy unchanged on expectations of 0.1% - all of this is in stark contrast with yesterday's PPI as the Department of Truth can no longer even get its story straight (link)
• Empire Manufacturing in october at 15.73 on expectations of 6.00 and previous 4.1, as somehow economic activity in New York picked up (link)
• Advance retail sale M/M 0.6% on expectations of 0.4%, previous 0.7%(link)

All in all good data, which is now too little too late - the madman has been unleashed

More broken gospel from the Central Bank of faith and hope, as gold surges, despite what anti-gold bugs out there preach day in and out:

• Fed's Bernanke says sees case for further action with too low inflation
• Fed's Bernanke says Fed could buy assets, alter statement
• Fed's Bernanke says hard to determine pace, size of any purchases, must weigh costs, benefits in deciding how aggressive to be
• Fed's Bernanke says Fed has tools to ease when rates near zero, earlier bond-buying was successful in lowering long-term rates
• Fed's Bernanke says risk deflation is higher than desirable, unemployment clearly too high
• Fed's Bernanke says at current rates of inflation, short-term real interest rates are too high
• Fed's Bernanke says unemployment to decline slowly, prolonged high unemployment would pose risk to sustainability of recovery

Fasten your seatbelts: Bernanke, retail sales, CPI, Empire Index, Michigan consumer sentiment, Business inventories, Donald Kohn, Budget Balance, and, of course, POMO

• Asia stocks, currencies fall on concern growth is slowing; Dollar rebounds.
• China September property prices rise 0.5%, defying curbs.
• Confidence among US CEOs falls to lowest level since May 2009: Bloomberg survey.
• Dollar fall sparks stability warnings; Gold hits $1,380, Aussie dollar nears parity.
• Euro above $1.41 ahead of Bernanke speech.
• European Union September new-car registrations fall 9.6%.
• Foreign direct investment in China rises 6.1% as growth attracts Renault.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 15/10/10

Readers have already likely had the chance to read the official Fed mouthpiece's bulletin on what to expect out of Bernanke's speech tomorrow at the Boston Fed. Since as we have disclosed previously anything that comes out of the WSJ on the topic of the Fed, gets Calvin Mitchell's stamp of pre- and post, approval we are positive the propaganda spin is in place: after all, can't make the Fed seem "too transparent." So while we are on the topic, here is Goldman's Sven Jari Stehn to confirm just what is best for the bankers:  here it goes "For example, Glenn Rudebusch’s analysis—which assumes that Fed purchases
have larger effects on the economy than we estimate—implies that the
Fed would need to buy around $2tr of additional assets to compensate for
the zero bound."Did Goldman just informally double its QE2 expectations, and implicitly bring the 30 Year rate to zero, now that the Fed will have to buy every single treasury out there within its SOMA limit (oh yeah, that 35% SOMA cap - we give it 6 months).

Pretty much answers every question one may have ever had about the secret goings on in mysterious cult in the Marriner Eccles building and on the 9th floor of 33 Liberty.

This week we have official confirmation of our speculation from last week, that the Fed is now the second largest UST holder institution after China, with $821.2 billion in Treasurys. And courtesy of yesterday's POMO schedule announcement, according to which the Fed will purchase $32 billion in UST through November 8, at which point it was have $853 billion, we now know that Brian Sack will be the biggest holder of US Treasurys in the world (surpassing China's $847 billion). Aside from this there was little notable in the weekly balance sheet update: bank reserves increased by $29 billion in the past week, as Primary Dealers added even more to their purchasing capacity post the end of quarter window dressing (more in an upcoming update).

The following observations by John Lohman are a must read for all mean reversion junkies. By tracking the correlation between credit expansion and assorted metrics of volatility, Lohman concludes that the one primary tradeoff given up by the investor class (voluntarily) and the broader population (unknowingly) in exchange for a 98% decline in the value of the dollar, and thus purchasing power, since the inception of the Jekyll Island monster, is a constant and gradual decline in volatility. What this means, however, is that by entering the period of greatest systemic deleveraging, America is once again inviting volatility. What is more troubling is that unlike before, the ongoing dollar value destruction is not matched with a favorable attribute, namely an offset vol reduction. In other words, society and the investing class has gotten to the point where the marginal utility from having a Federal Reserve bank, has essentially disappeared. Which is simply all the more reason to disband the most destructive central-planning organization in the history of the communist world.