Archive - Aug 11, 2010 - Story

Nassim Taleb is out making waves once again, this time at the Discovery Invest Leadership Summit in Johannesburg today, where he said he was “betting on the collapse of government bonds” and that investors should avoid stocks. To be sure this is not a new position for Nassim, who in February had the same message, when he said that "every single human being" should be short U.S. treasuries. Indeed since then bonds have gone up in a straight line as the bond bubble has grown to record levels, and with the ongoing help of the Fed, is it any wonder. The only question is when will this last bubble also pop.

Today's task before the Fed and the Direct bidders was the clean, calm digestion of $24 billion in 10 years. And as expected, this passed without a glitch at a 2.73% high yield, the third lowest yield in history, following just auctions in December 2008 and January 2009. Yet unlike yesterday's 3 Year auction, which also posted the highest Bid To Cover in history, today's BTC was not as strong as in the previous two auctions. Is the yield on the 10 Year becoming so low as to not be attractive for the Primary Dealers? Indeed, the takedown by primary dealers dropped to 43.6% from 48.6%, and an average 46% in 2010. Direct bidders accounted for 10.6% of the auction, while Indirects took the biggest portion of the auction since November 2009, or 45.8%. It also appears the real yield on the auction would have been lower as the allotted at high was only 10.57%, while the median yield was even lower, or 2.669%, suggesting interest in the Dutch auction was even higher than demonstrated by the end result. Yet all eyes are focused on tomorrow's 30 Year: as the 10 Year is now actively to be gobbled by the Fed, the 30 Year is the only orphan left in the curve without the Fed's explicit purchasing, and as such, surprises are not unlikely.

In what could be the most important news of the day, German Die Zeit reports that, in a stunning move, the EU has ordered Germany to count the holdings of WestLB and Hypo Real Estate (the latter of which failed the stress farce from last month which nobody cares about or remembers anymore) as government debt!  As Bloomberg notes, "That could raise Germany’s debt to 90 percent of gross domestic product, Die Zeit said." Of course the implications of this decision are massive, as it takes out all the guess work of whether insolvent institutions are or are not on the government's balance sheet. The net result, for Germany alone, is that just the addition of Hypo's debt would push German debt/GDP from 79% to 90%, both of which are well above the Maastricht limit of 60% (not like anyone cares that is - everyone is now aware the EU is a failed experiment). The next question: what happens to nationalized RBS and it $168 billion in debt? Total UK debt is $1.2 trillion meaning a comparable action in the UK would rise UK debt by 15%! And then there is a whole slew of other banks in the pipeline in Europe that are full of trillions in toxic debt: will the sovereign hosts be able to onboard this debt? Most importantly, what happens to our administration's adamant claims that Fannie and Freddie's $6+ trillion in debt should not be counted as part of total Federal debt. America already has its hand full with $13.3 trillion in debt. What will happen when it moves to $20 trillion (140% of GDP) overnight. We are confident that unless this decision by the EU's statistics office is overturned, it will likely set off the next leg in the sovereign debt crisis as suddenly European Debt to GDP ratios will increase by about 15-20%.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 11/08/10

Fundamental analysis is no longer relevant as Alpha has just done one more revolution in its grave: today 1 Year Implied Correlation hit a new all time record, at 79.84 (out of 100 maximum possible), meaning the inverse of the metric, stock dispersion, or the measurement of the variation in individual stock prices, or broadly speaking alpha, is now completely irrelevant. As we have been saying for a year, "investing" is now all about a levered beta bet, using the maximum possible leverage, and sacrifices to Moloch, that the market does not turn before price targets are hit. At this rate we anticipate the next broad or acute selloff, will take us to 100 in implied correlation, at which point there will be no benefit whatsoever to trading individual stocks: the entire market will be one big ETF.

Earlier, we posted a link to Boston University's Lawrence Kotlikoff who penned an OpEd for Bloomberg titled simply enough "U.S. Is Bankrupt and We Don't Even Know." In it Kotlikoff took a direct stab at Krugman and all the other hard core Keynesian paradise or bust demagogues: "Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run. This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance. Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue. My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain 'solutions'." To hammer his critical point in that delaying the inevitable crunch will only make things worse in the end, Kotlikoff also appeared on Bloomberg TV with Erik Schatzker. Koltikoff's argument is anchored by the IMF's July report that notes the US needs to grow at 14% in perpetuity to "grow into" its balance sheet. Obviously, we will be lucky to get a tenth of that.

Just when you thought gold could go through at least one major selloff day without some remarkable fireworks, here comes a perfectly natural $10 selloff in the span of under a minute, because that is precisely how a quantized and "deep" order book looks like. Just how related this is with the reopening of the ECB's FX swap lines with the US is unclear. We are confident the BIS will be perfectly happy to provide commentary on the issue.

So who were all those saying this is an insane plan?

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Here is another reason why the market may soon undergo Flash Crash 2.0 on purely structural reasons that have nothing to do with the deranged computerization of capital markets - the one natural decelerator to any market collapse, short interest, was just reported by the NYSE to have hit a 7 month low, at 13.7 billion shares. This metric hit a 2010 high of 14.5 billion in the days following the flash crash, when the natural response by investors was to follow through on waht was expected to be a major market swoon. Yet the odd July move higher on no volume which was a direct replica of last year's action cut off this move into shorts early on, and the result now is that the short interest buffer is now gone. Absent the mystery bidder appearing, there will be few "profitable" buyers remaining to prop the imminent market crash.

...And proud of it. He also provides his latest investment basket recommendation: "So, while I continue to advocate underweight positions in equities, a bar bell between basic materials and defensive dividend stocks is a prudent strategy, with the overall emphasis in the asset mix tilted towards bonds, especially the BB sliver or that part of the higher quality non-investment grade space that currently has the greatest unexploited potential for spread compression and capital gains."

The pain for the biggest groupthink trade over the past year, the curve steepener, is getting unbearable. The 10 Year is now pushing below 2.70%, last hitting 2.69%, the lowest in over 16 years, as the 2s10s is at 219 bps, or the tightest since April 2009. At the same time, deflationary CMS trade are printing money. Look for many more steepener unwinds, especially if the 10 Year continues on its steady path to 2.5%. At this rate the record level may be hit in as little as 24 hours. And unlike before, equities tamely follow through the deflationary path suggested by credit. And now that equities have finally regained some semblance of rationality, they have a long way to drop: according to the mid-term chart between 10 Year and stocks, the fair value of stocks is around 1,025, or 75 points lower. We expect this level will be recaptured shortly.

The Fed continues to send schizophrenic signals, as one day after announcing it will be purchasing hundreds of billions of bonds it completes yet another half a billion liquidity extracting tri-party repo. This time the Fed used all three core types of collateral: USTs, MBS and Agencies, transacting in $180 million of each, paying an average stop out rate of just over 0.2%. We just wonder who the Fed is trying to fool with these "tests" - it is more than obvious that the Fed will never tighten again, or at least not until the next regime takes hold... some time after the debt repudiation event.

I will not waste too much of your time to start the day. I remain bearish equities from 1,126, and would use 1,117.50 as a trailing stop here. The key support below is 1,083, and we can expect a bounce there possibly, but if we don't break 1,100 rapidly I will become more concerned about my view. The fact is if the bearish scenario plays out here we should be in a wave 3 or C lower, which either way is quite impulsive. So indecisive price action would make me question the downside a bit. The one thing that can comfort bears here is the Nasdaq daily chart which has a quite bearish set-up here. - Nic Lenoir

The newsletter gurus are now going at it all out, and the bone of contention is, not surprisingly, gold. "With fiat money in retreat all over the world -- and currencies devaluing against each other, the world's peoples will turn to the only money they can trust -- gold. I'm aware that Prechter believes gold will be heading down in a deflation, I disagree. I was there during the Great Depression, and I can tell you nobody at that time had dollars. But if you did have dollars they were trusted and they were considered as good as gold. Today, it's different. The very validity of the dollar is in question."

As the attached chart shows, the recent Obama initiative to push exports to double in 5 years has started off, just like all other administration efforts, as an abysmal failure. The June balance of trade plunged to ($49.9) billion, on expectations of ($42.1) billion - a surge of $8 billion compared to May's ($42) billion. This number was the highest since October 2008, and just $28 billion away from the all time record. At least we now know who the mystery "importer", that extracted Europe from the economic abyss, was in the past 3 months. And courtesy of the Current Account equation, what this surge in deficits means is that Q1 GDP will now likely be revised to well under 1.0%! As JPM reported earlier, revision in BEA assumptions on wholesale and non-durable inventory alone will push Q1 GDP from the official 2.4% to 1.3%. Today's data is the last nail in the Q2 GDP number, and according to analyst will take out another 0.4% from the GDP, meaning that when all is said and done, Q2 GDP will come out to sub-1%. And this was in a quarter when the stimulus was still expected to be boosting GDP. We now fully expect that the final reports of Q3 and Q4 GDP, some time in 2011, to be solidly negative, as the economy is now officially contracting once again. In other words, the Double Dip is (even more) official.