Archive - Mar 2010 - Story

Fed (and most other central bank) policy is not inflation. Inflation is only a by-product. The real objective is spread compression. The yield curve is the spinal cord, and all spreads from it constitute the nervous system. Spread compression just means that the key policy control lever is the distortion of credit risk. This is why Greece is getting a bailout in some shape or form. A failure to bail out Greece will result in a long-lasting increase in interest rates for all sovereign sad-sacks with impaired financials: Italy, Portugal, Spain, and Ireland, England, on and on. With long-lasting interest rate hikes come increased debt burdens. This is something that government finances including the United States, can scarcely bear. What they don’t understand is that purchasing Greek government bonds and restricting CDS provides only a brief respite. The new weakest links in the chain will be the ones who bailed Greece out. This is why forced spread compression as a policy is problematic: it is unstable. There is lots of downside, but not much upside. The downside is that governments playing this game get caught in the spider webs. There is no entity big enough to bail out the entire world.

Greek taxpayers are not happy, and in this clip from Bloomberg, they make it painfully obvious. With parliament now having officially passing austerity measures, the question remains: will strikes and demonstrations persist, or will the Greeks tire out and go back to their old, and much poorer, ways. Alternatively, with the ruling PASOK party now certain to plummet in popularity, what would happen if the ND is voted back in ahead of time? They already made it clear that austerity is not an option. And with all of European posturing focused on what Greece promises to do, should those promises be recanted, what then?

Last year General Motors said it was reading the last rights to some 1,100 of it's 6,000 dealer/franchise network- in a response to the decline in sales, part of a restructuring plan designed to save the troubled auto giant.

I guess with all the muck they've thrown at Toyota, General Motors figures that's good enough to save 600 dealerships?

Either that, or they just don't want the hassle.

Compliments of reader Chindit13, we present to you this parable on how to keep your sanity under the modern version of "efficient" markets. For full effect, we also recommend a CDS-unhedged shot of ouzo, a triple rereading of Seth Klarman's lessons promptly forgotten, and two pills of 50 mg Amoralhazardine, followed by a visit to your central banker in the morning (just to be safe).

Today, the market spiked in the last hour of trading after it was announced that total consumer credit increased for the first time in a year (not all credit, mind you, just car loans; consumers are still eagerly paying down their credit cards). And who was the source for this generosity you may ask? Why, the US Government of course. Not only that, but Non-Seasonally Adjusted Consumer credit was actually down by $4 billion. But let the government have its smoothing fun. On a non-seasonally adjusted basis, consumer credit has declined by $108 billion in the past 12 months. What may be surprising, is that were one to strip away the contribution from the Federal Government of $78 billion, the decline would have been almost double, or $187 billion. Furthermore, in January, NSA consumer credit would have declined by $14 billion had it not been for the... wait for it... Federal Government, which sourced $10.4 billion in new consumer credit. So here is what happens in case you haven't figured it out already: the government takes taxpayer money, and lends it out to all sorts of destitutes at zero % interest, who have to keep up with the Joneses at all costs, and even though can not afford to put down any equity, must buy a new car every 6 months (even though they have likely not made a mortgage payment in about a year... not to worry, Uncle Sam is footing that too via the Federal Reserve and Fannie and Freddie), and when the news of the government's generosity hits the market, and the spin is that Americans are again confidentenough to borrow, the few SPARC machines left trading do whatever Liberty 33 tells them to, and bump up the total capitalization of the market by about $20 billion, putting money straight into the pockets of Goldman Sachs and other recent bailoutees, who without doubt deserved a $70 billion bonus season in 2009. And now you know where your money goes to.

It's Friday after the close - time for the government to sneak one past traders, who are already on their fifth moqito. And sure enough, the bomb today comes from the Congressional Budget Office: The CBO, in an annual analysis of the White House budget proposal, said today that under Obama’s plan deficits would never shrink below 4 percent of the economy between now and 2020. The cumulative deficits would total $9.76 trillion, and debt held by the public would amount to 90 percent of the nation’s gross domestic product by 2020, the CBO said. In other words, the CBO has just confirmed that America has, at best, 10 years before it is officially bankrupt. That's about 9 years of multi-trillion bonuses for Goldman Sachs. Congratulations fellas.

According to the CFTC's Commitment of Traders report, non-commercial speculative shorts in the Euro declined for the week ended March 2, and for the first time in over two months, tracking the move of the EUR higher over the past week. Total net positions declined from -71,623 to -66,770, or a net long increase of 4,853. This is still the second highest net short exposure in over two years.

On the other side, a stunning push in Yen long exposure increased the net long Yen positions from 1,717 in the prior week to a whopping 32,552. The next question: will Japan promptly ask all these speculators to performSeppuku after they have done all they can to make the Yen more expensive, thus laying Japan's best laid plans to stimulate inflation to waste.

The third most relevant currency, the British Pound, saw a net short increase, with net short Non-commercial contracts increasing from -64,647 to -67,549.

Deep thoughts from T.P. Raman, Managing Director of Sundaram BNP Paribas Asset Management (and others).

The January G.19 statement is out, and confirms that consumers are buying ever more cars on credit, as if we didn't know this. Non-revolving credit, which is basically comprised of car loans increased by about $7 billion to $1.592 trillion, even as revolving credit continued declining, hitting $864 billion, down from $866 billion. Obviously, the market, which the last time the G.19 was released bounced, regardless that credit then declined by $4 billion is now bouncing again, not really sure why, but just tagging along with the computers. And the computers may very well be right: with the government soon expected to foot all consumer credit card losses in addition to GSE and financial firm toxic asset losses, why not just max it all out, after all mortgage payments are now about 6 months in arrears and nobody from the lender bank gives a rat's ass. Out of sight is out of balance sheet impairments. Credit is back, baby. And not like anyone will ever ask you to repay it.

The primary Greek opposition party to the ruling Panhellenic Socialist Movement (PASOK, which currently has a Parliamentary majority) has announced in Greek daily Ekathimerini that it would vote against the Austerity bill, thereby splitting a tenuous and brief period of consensus with the ruling party. The conservative New Democracy, which controls a mere 91 Parliamentary seats (out of 300 total) has said it "will only back certain articles of the draft law when it is voted on in Parliament today." Just more political posturing, or a catalyst for even greater social unrest? Keep an eye out on the euro for hints (so far, none).

“We must succeed at putting a stop to the speculators’ game with sovereign states. We can’t allow speculators to be the profiteers of Greece’s difficult situation. Derivatives must be curbed.” - Angela Merkel

The following very interesting analysis from Goldman focuses on an issue long-discussed on Zero Hedge and elsewhere, namely what happens when those millions in unemployed currently collecting unemployment insurance, finally start to roll off extended and emergency benefits, as terminal benefit exhaustion sets in, even with ongoing governmental unemployment stimulus programs. Goldman's estimate: approximately 400,000 people will no longer have the backdrop of so-called "government jobs" in which workers receive on average $1,200 a month for doing nothing. "If the rate of exhaustion continues at the current pace, this implies over 400,000 workers will exhaust their benefits in some months, even if Congress continues to extend the current, more generous, unemployment program." What this means for the economy is, obviously, nothing good: "Assuming something on the order of 400,000 exhaustions per month, at an average benefit of $1200 per month, this implies roughly $0.5 billion in lost monthly compensation compared with a scenario in which there are no exhaustions. If the relationship between exhaustions and initial claims 16 to 17 months prior (the maximum benefit period in most states) holds constant, the pace of exhaustions is likely to stay elevated for several months, implying several billion dollars in cumulative lost compensation." Couple this with front-loaded tax refunds, also previously discussed on Zero Hedge, and the "consumer-driven" economy in next few months is sure to see a rather substantial shakedown. Absent a dramatic increase in (c)overt Obama unemployment stimulus, is the extend-and-pretend phase of the bear market rally about to end?

“To reiterate, I continue to think that it would be a mistake for Congress to take action that formally conferred on Fannie and Freddie debt the legal status of debt issued by the Treasury. But nothing in that position prevents Treasury from acting as it thinks best with regard to its obligation to provide stability to the housing market and the financial system.” - Barney Frank, Post Appendage In Mouth

A few days ago the Cleveland Fed released one of the most pathetic attempts at pandering public support in the form of a video clip that apparently was created by a special ed detention brigade. Today, we present a remix of the very same clip, whose message we believe is much more relevant to our current economic situation.

As the Fed is ever-so-gradually shifting toward a tightening posture, many have wondered what will Bernanke's actions mean for the bond curve. With various liquidity facilities set to expire this month, and the recent discount rate hike already having been priced in, there has so far not been a muted response by the bond market, although over the past few days we have seen an odd tendency, albeit minor, for curve tightening. We say odd, because as Morgan Stanley points out, the Fed's actions, coupled with an unwillingness to actually hike rates, should be one benefiting ongoing steepening. Then again, the problem with that logic is that at this point going steep is like buying Greek CDS today: it pretty much means sloppy hundreds, with very few greater fools left over (and without the opportunity to arb a naked-short position via another nearly busted GGB auction). The silver lining is that at least the government will not go after you with an arrest warrant: after all the government wants nothing else more than a vertical yield curve. A brief analysis by MS details the argument for why steepening makes all the sense in the current environment where the long-end is looking increasingly shaky courtesy of marginal liquidity contraction, all the while risk-flaring episodes such as those in Dubai and Greece will likely keep the short-end well bid for months, if not years, to come.