Archive - Nov 2010 - Story

As a disgusted and powerless nation (save for a few irrelevant, ex-Enron consultants) is drowning its post-QE2 monetary sorrows in Blue Label courtesy of a recently, if very temporarily, discovered wealth effect, we present a comedic interlude which presents (in proper chronological order for facility of reading) the email chain that culminated with the decision to embark on the QE2.

While we approach the topic of Paul Krugman with the same eagerness one approaches a clogged up, never cleaned, bathroom at a frat party that is about 50 years past its due date, (pretty much like Keynesianism) this one just put us over the top. In his latest pointless drivel on the economy, instead of reverting to his usual mode of praying to John Keynes, bitching at those who dare call for accountability and the punishment of all those, such as Krugman, responsible for what is now a $4 trillion taxpayer monetary bailout tab, and begging for trillions, then quadrillions, then quintillions, then an infinite amount of money, the Op-Ed writer has instead decided to start a mudslinging campaign against none other than Jim Rogers, the co-founder of George Soros' Quantum Fund, who has been pretty much spot on with his calls for decades.

In the realm of unintended consequences, one of the side effects of QE2 is that going forward US economic data will be broadly ignored from a global macro standpoint: as bad economic data is masked by expectations of further Fed involvement, and further Fed inflation stimulation, while any actual improvement is misperceived as a one-time response from a liquidity kicker, the rest of the world will no longer have an anchored trade and thus FX view based on incremental data developments, be they good or bad, as an objective distinction is now impossible. What this means practically is still too early to determine, as the world has never existed in such an information limbo, but the closest approximation of the perversions to the very matrix of cause and effect is that the market now sells good news and buys bad news with impunity. This is a recipe for disaster. It also means that with the US economy irrelevant as an indicator of pretty much anything, decision-makers will be forced to look elsewhere for catalysts. BNP Paribas has done of the better summaries of precisely this sad state: "The Fed has acknowledged that there is substantial slack in the US economy indicating that it will take potentially years to bring the unemployment rate down to levels associated with full employment. Hence, a strong number will still leave the Fed committed to the USD600bln asset purchase it announced Wednesday. A weak labour market report will make the market assume that the Fed might have to do even more asset purchases. Hence it will not be US data disturbing the risk on trade, the trouble will likely come from Asia or Europe." What we believe this means, is that very soon the dynamics of globalized economics, and of stock markets, will be defined by the polar opposites of an emerging market bubble (Asia), and a developed economy, floundering deeper into fiscal austerity and borderline insolvency (Europe). Thus soon the ideological tug of war will be one of whether the Asian bubble implodes first, or whether it will be preceded by the failure of peripheral European countries.

As Goldman's David Kostin points out, this week's key capital flow observation had little to do with QE2 (which at $600 billion over 8 months, was actually less than the anticipated $500 billion over 6 months), which had a far greater impact on commodity prices as Zero Hedge had expected (and ES was down in gold for the week, and continues to be very much down for the year), and all to do with the Fed's "non-announcement" that it would allow financial firms to recommence dividends. This resulted in a spike in financial shares, which jumped the most in the prior week. In light of Friday afternoon's repeat announcement that a Federal agency (this time the Chicago FHLB) was following in the footsteps of the FRBNY, and claiming Rep and Warranty fraud over $375 billion in RMBS, banks won't be depleting their reserve funds any time soon. But all is fair in war and industry rotation, even if it makes no sense. More to the point, even Goldman advises clients this as nothing but a headfake: "We currently recommend a neutral weighting in Financials although we recognize the positive impact a round of dividend hikes will have on share prices. Our concern relates to the lack of loan demand, slim net interest margins as the yield curve flattens, restrictions on business activity from “Volcker Rule,” Basel 3 capital requirements, and the impact of Fin Reg." But since when did fundamentals matter? These days it is all a question of fund flows, typically those originating from the Federal Reserve.

The three man who destroyed Keynesianism discuss the origins, history, and future of the Federal Reserve. Watch Greenspan, Bernanke and Corrigan discuss the last 30 years of America's monetarist system.

Obama's biggest fan-turned-critic is back, this time with a gloating epitaph to what has been a disastrous two years for the US economy, which has so far been prevented from collapsing, thanks to the trade-off which is making Wall Street richer than ever, the middle-classes poorer in real terms than ever, and letting the country to plunge to a record level of indebtedness, which merely guarantees that when the inevitable day of reckoning comes it will be that much worse.

Nothing makes sense anymore. At least that is the conclusion one would reach from looking at today's CFTC update (and keeping track of the market for the past two years). In today's CFTC Commitment of traders update, the most notable feature was that net non-commercial spec positions increased for the fourth week in a row as ever more dollar shorts are getting spooked that the dollar is due for a violent pullback (of course, only if the most honorable chairman allows it). Other currencies were relatively flat, with the CHF unchanged, EUR longs declining minimally, while net contracts betting on a rise in the GBP jumping to their highest level in 2010. Elsewhere, a sample of commodities (Wheat, Soybeans, Coffee and Corn) all saw a non-commercial increase W/W: expect these push-pull feedback loops to result in a surge in all food products by the time the holidays roll in. Lastly, the indicative Treasurys (2,5, 10Y) after seeing a substantial drop last week, once again resumed their move higher (the 5 and 10 Y), except for the 2 Year, which non-commercial speculators are now believing will drop. It would be funny to see a square root shaped curve: the 5 Year at 0%, while the near and long ends taper off ever higher.

Not even two full days have passed since the announcement of what will become the single biggest monetary stimulus/experiment in the history of the world (since anything that never ends is by definition "biggest"), and here come the fiscal aid panhandlers. In an email just sent out by the Derpatment of Labor, Hilda Solia has officially requested an extension of the EUC program which is expiring in November and which will leave 2 million unemployed Americans without insurance benefits after November (and 6 million by the end of next year). Obviously this plea for fiscal heroin will be granted: how else can the country that has now become a utopian experiment in socialist-fascist fusion, supposed to delude the world that 42 million Americans on food stamps are actually not going to benefit from Ben Bernake's actions? And after all, if the DOL is denied, how else will the bankers defend themselves when 60 million cold and hungry Americans come knocking on their door, asking for a little of that $3+ trillion of Fed luvin'?

The following chart prepared recently by JPMorgan demonstrates something rather scary, and makes it all too clear how the Chairman's plan to "assist" the US population via some imaginary "wealth effect" due to QE2, is about to backfire. As is now becoming very evident, the prices of energy and food products are about to surge, and in many cases have already done so, but courtesy of some clever gimmicks (Wal Mart selling what was formerly 39 oz of coffee as a 33.9 oz product for example) the end consumers haven't quite felt it yet. They will soon. There is a limit to how much every commodity can open limit up before it appears on the SKU price at one's local grocer. And while a marginally declining "core CPI" is irrelevant for this exercise as it measures only items that are completely outside of the scope of everyday life, what will be far more important to end consumers will be the push higher in food and energy costs. The problem, however, is that for the lowest 20% of Americans, as per the BLS, food and energy purchases represent over 50% of their after-tax income (a number which drops to 10% for the wealthiest twenty percentile). In other words should rampant liquidity end up pushing food and energy prices to double (something that is a distinct possibility currently), Ben Bernanke may have very well sentenced about 60 million Americans to a hungry and very cold winter, let alone having any resources to buy trinkets with the imaginary wealth effect which for over 80% of the US population will never come.

Like “cash for clunkers,” the housing tax credit and other attempts to provide short-term fuel, the Federal Reserve’s second round of quantitative easing can only buy a little time to fix what ails the economy. Unfortunately, in the prior instances, the short-term fuel led to short-term complacency about the economic trajectory, leading policymakers to let down their guard. In the end, all that resulted was a letdown for the economy. What’s different about quantitative easing — an effort to lower market interest rates by bidding up Treasury debt — is that the Fed has no ability to direct its fire. What’s likely is that much of the investment capital freed up by Fed purchases of Treasury debt will overshoot its target — the U.S. economy — and flow to emerging markets and especially into commodities that serve as a hedge against a falling dollar.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

A casual look at just the headline at total consumer credit, which increase on a SA basis for the first time since January 2010, could give on the impression that all is well in borrowing land, and that consumers have finally stopped deleveraging. Wrong. While the seasonally adjusted number indicated a rise of $1.1 in total credit the true story once again lies below the surface. To wit: revolving credit, or actual credit as represented by credit card borrowings, plunged by $8.3 billion, the most in 2010! What offset this was the surge in non-revolving credit, which increased by $10.4 billion in September: the biggest increase since August 2007, just before everything went to hell.Note the glaring move higher in September non-revolving credit (i.e., borrowing for car and school loans).

Just because a red close in the only index the Department of Wealth Effects tracks, the Dow, would seem oddly suspicious in a market that is now entirely controlled by Benny army's of Hewlett Packard inkjets, we get news from two trading desks that the SPY just went HTB in the last ten minute of trading, coupled with some forced buy-ins for good measure. The farcical result is presented below.

In its just released 215 page 10-Q, BofA announced it has just overtaken Goldman, and where even Goldman ended up having days with trading losses, Bank of America was perfect. Gotta love all those 3rd grade BofA prop traders (as an FYI to all, BofA is where you go where the safety school equivalent of prop trading dumps you). What is more interesting is that the seemingly flawless trading machine which is BofA has just disclosed it has received a complains by the Chicago FHLB, Cambridge Place, and Charles Schwab (and others) that allege misrepresentations in over $375 billion worth of RMBS. It appears the FRBNY is not the only entity that now is gunning for the scalp of the last remaining flawless frontrunner.

When two months ago we looked at what the implied job creation rate must be for the US to get back to the same level of jobs as December 2007 when the original depression started (now that the recession is over) by the end of Obama's now extremely improbable second term, we arrived at a number of 229,300 per month. Updating for the data two months later, after today's NFP data, results in a breakeven growth rate of 232,400 per month. In other words, America now needs to create an additional 3,100 jobs per month compared to two month earlier, to merely revert to the state in employment last seen in December 2007, let alone create additional jobs. Keep in mind that unlike the economists in the government, we actually index the growth rate to adjust for the growth in the projected labor force which grows at 90,000 per month.