Archive - Aug 23, 2010 - Story

The debate over whether bonds are in a bubble is very much the topic du jour, and while some deflationists like David Rosenberg believe that not only is there no bubble, but the 10 year will soon slide inside of its all time tights at under 2.1%, others believe the 30 years bull run in Treasuries is the dumbest thing since the dot com bubble, and that if anyone is hoping to make money, it should be on the countertrend. Two such Treasury bears are Marc Faber and Peter Schiff, both of whom were on CNBC tonight, and both were dissecting what in their view is the fallacy of the long-UST trade. As for the Faber-Schiff view, no surprise: Peter encapsulates it best: "the bond market is the mother of all bubbles right now, and when it bursts the losses will dwarf the combined losses of the stock market bubble and the real estate bubble. There is no way for the government to pay this money back." And echoing a topic Zero Hedge has been warning on extensively, namely the maturity of trillions in short-term debt that rolls every month, Schiff notes: "I am afraid is that when people realize we can't pay this money back, we aren't going to be able to roll over all this short-term debt. And so it's not just paying the interest, we are going to have to retire the principal." Peter Schiff is correct that inflating our way out of this debt bubble is a lose-lose proposition. Schiff also notes the stupidity of crowds, by highlighting that 10 years ago everyone was chasing risk, by piling into stock market funds, followed by everyone knows what. The outcome for bond investors is clear: "this decade is going to be the worst decade for bonds in US history. Bond holders are going to get wiped out. Either the government is going to default, or it is going to inflate, but either way the people holding the bonds, are holding the bag."

The insolvent state of California which, just like the country of the USA, is operating without a budget (and who needs a budget when the Fed-PD complex will buy the bulk of anything and everything needed to fund ongoing daily operations), has once again ended up on the verge of bankruptcy. As a result, it has just passed a measure which for the second time in as many years (going all the way back to the Great Depression), will allow it to use IOUs in lieu of payment on everything from supplies to contracted services and health-care costs, so it can actually preserve cash to make payments to its generous debtors. On the road to banker serfdom, California has once again reached its goal.

Spreads closed marginally wider, at the worst levels of the day, after an anemic volume day that only picked up in activity when we weakened. Overnight angst from Australia combined with some weakness in EU data was marginally trumped early on by M&A chatter and headline spin on US ECO data but further evidence of a deflationary view of the world (NSC 100Y issue) seemed to provide some downward pressure and despite valiant attempts to steepen the curve or drive AUDJPY up, stocks ended at their lows of the day as did spreads at their wides.

We have had a number of clients asking about our views on the forthcoming GM IPO. Suffice it to say, and in the interests of brevity, we are not overly impressed and worry about this on many fronts as anything but a flipper's fantasy (drop us a line for somewhat more coherent thoughts). Most notably we have noticed something rather fascinating in the Auto sector. The relationship between GM's 2016 bonds and the Ford Equity price has been amazingly (and we mean incredibly) consistent for many months now - a simple arb at around 2.5x Ford's stock price explains huge amounts of variance in the GM bond price and we suggest tracking this going into the IPO for any signs of a preference. One we would expect is selling of Ford to buy into the GM IPO in hopes of flipping soon after and still leaving the manager equally exposed to the Auto sector - this would also be interesting as the GM bonds have residual ownership in the new GM and may be a decent hedge here should the deal be 'better' than many expected. Just thinking out loud on this but we will keep an eye on it.

Goldman Sachs has put together a very informative chart, as part of its European chart of the day series, which shows the discrepancy between household accumulation in domestic and foreign denominated debt. While HUF-denominated debt is a mere 12% of GDP, FX-denominated is at almost 50% of GDP. Most of this debt is CHF-based, and with the CHF hitting fresh record highs, the pain for debtors is becoming unsustainable due to the relative FX strength. And while, as Goldman points out, new FX debt accumulation has plunged, the legacy positions will be there for a long time. For this debt to clear out, the Balance of Payments for Hungary and other non-euro countries will enforce a very prudent deleveraging regime, and will require that the economies grow, not contract. The last is something that is very much in question for Hungary, which as we pointed out recently, has decided to go it alone with IMF assistance, and thus without a safety net backstop should things not work out as expected. Either way, the bottom line is that as European countries loaded up on EUR-, and especially CHF-, denominated debt when the currencies were cheap, the current violent swings with a rising bias, will make the pain for the peripheral countries all that much more pronounced.

The ongoing disclosure about the tax-evasion habits of Greece's rich and famous, has recently hit new amusement highs: a crack down on the ultra high net worth individuals, those who have one or more powerboats parked in the Athens marina, indicates that a majority have declared incomes of less than €40,000 in the past year "an amount that would barely cover their cost of fuel." The good news is that with yacht owners sweating, the sale offers on Athens yachts has surged. The unpleasant alternative - if owners refuse or are unable to pay new taxes, which could include a VAT at 23% on the price of the boat plus another 10% luxury tax, as well as a punitive fine, amounting to 66% of the cost of a new boat, the authorities will confiscate the boats. And as can be seen by this satellite photo of the Alimos Marina, there is more than enough boats for sale to satisfy even the most snobbish tastes.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 23/08/10

As more and more people voice their displeasure with the hijacking of the stock market by assorted HFT bucket shops (and oligopolies), with persistent defense by such industry participants as Irene Aldridge notwithstanding, we would like to present the latest opinion by Abel/Noser co-founder, Gene Noser (whose firm recently confirmed that just 99 stocks account for 50% of all daily trading volume) who explains where, in his view, we went wrong with market structure, courtesy of the ever accelerating technological encroachment, and provides five suggestions on how to fix the market, and begin to eliminate the various parasitic influences of the HFT fake-market making brigade.

Need a 100 year inflation outlook? The market has spoken, and courtesy of the liquidity glut, it appears the outlook a century down the line, is for a 5.95% inflation give or take (yes, yes, we know this is not scientific: we are hoping the soon to be released 100 Year swap spreads will give a better read). One wonders what happens to this yield if the Fed's trillions in free money sloshing around the markets are eliminated.

Full pricing grid, courtesy of sole manager (and recent deflationist) Goldman Sachs:

Norfolk Southern Corp "NSC" Baa1/BBB+/BBB+ (s/s/s) upsized USD250m (up from $100m) 100y reopening of 6.00% March 2105 sr fixed rate notes launched at 5.95%. GS (sole books). Co-mgrs: Barclays.  UOP: GCP. Pricing today.   Original USD300m issue priced March 7 2005 (6.00% at 100).

As we reported first, last week saw the second confirmation of the Hindenburg Omen, most recently sighted for the first time on August 12. Presumably this is an indication of putting one's money where one's mouth is (and away from the market). “I’m taking it seriously and I’m fully out of the market now,” Miekka, a blind mathematician, said in a telephone interview from his home in Surry, Maine. “I would’ve probably stayed in until the beginning of September,” depending on how the indicators varied. “That was my basic plan, until the Hindenburg came along.”

It appears that the Fed is heading for its biggest legal confrontation ever. After, as Bloomberg reports, the U.S. appeals court refused to reconsider a ruling that requires the Federal Reserve Board to disclose documents identifying financial firms that might have failed without the largest U.S. government bailout, the one last resort to preserve the secrecy interests of the Clearing House Association which is basically the formal name for all the banks that have received Fed handouts in some form or another over the years, is now the Supreme Court of the United States. And should the SCOTUS go ahead and vote alongside the administration (in this case the Fed), as it did in the Chrysler case, the fallout could well be dramatic as it once again becomes clear that the one entity truly in control of this once-great country is a group of middle aged men, which conducts all of its decision-making in strict secrecy, and whose every decision is predicated upon the perpetuation of the ever more failed Keynesian status quo.

The opening rally gave way to sellers even after the stock index futures took out Friday’s high. The SOX struggled and the good feeling from “merger-Monday” wore out its welcome. When an opening gap gives back more than half, it doesn’t sit well with traders. The downside move took the NDX futures to just above Friday’s low while the Spoos held 5 above its respective low. We got a bounce which has led to the NYSE a/d to sneak back into positive territory by 200 issues. Many are searching and wondering what the catalyst will be to get the buyers back into the market. Some of the biggest trading rallies have started without any catalyst at all. Once a trend line level is breached or a 50 or 200 day moving average is taken out, it can attract buyers. All of a sudden money managers find themselves lagging and they have to put money to work. The first step to getting this to play out will be the market’s response to this weeks’ economic data. Watch the market’s response to data not just the data itself.

Every now and then it is prudent to repeat what is promptly becoming the most critical phrase of the 21st century, which is odd considering that it was uttered over 70 years earlier by then Treasury Secretary Henry Morgenthau, who wrote: “We have tried spending money. We are spending more than we have ever spent before and it does not work....  We have never made good on our promises.... I say after eight years of this Administration we have just as much unemployment as when we started ... and an enormous debt to boot!" And since this Great Depression is not really all that different from the first one, we would like to again present the must read analysis by the Mackinac Center "Great Myths of the Great Depression", which so far is predicting exactly where our own economy will be in about a decade: "At the end of the decade and 12 years after the stock market crash of Black Thursday, 10 million Americans were jobless. The unemployment rate was in excess of 17 percent. Roosevelt had pledged in 1932 to end the crisis, but it  persisted two presidential terms and countless interventions later." And let's not forget the conclusion: "Along with the holocaust of World War II came a revival of trade with  America’s allies. The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. A reinflation of the nation’s money supply counteracted the high costs of the New Deal, but brought with it a problem that plagues us to this day: a dollar that buys less and less in goods and services year after year." Why should this time be any different? And even post what many perceive to be an inevitable war outcome (because history sure does rhyme), what will America export this time around to start a new US Golden Age? Unfortunately financial innovation is no longer the hot commodity it once used to be.

Ten days ago we posted extended thoughts on the upcoming US demographic crunch, paraphrasing observations by Goldman Sachs, which speculated that with ever more individuals leaving the "prime-savers" demographic bracket, those aged 35-69, the (already meager) temptation to save in the US will decrease substantially going forward. Goldman was primarily focused on the implications this phase shift implies for future US Current Account deficits. Today David Rosenberg begins to tackle the US demographic issues from his own perspective, with his preliminary conclusions, as expected, not validating any optimistic perspectives before the US economy: "starting next year, this key age cohort for both the economy and the markets will begin to decline — according to official forecasts, each and every year to 2021. The last time we saw sustained declines in this part of the population was from 1975-83, which was an awful time for both the economy (except for that very last year when the negative growth rate in this age segment was drawing to a close) as the S&P 500, in real terms, was as flat as pancake and real per capita income barely expanded."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/08/10

Yields are low, unemployment up, CPI numbers are down—in short, everything screams "deflation". Nevertheless, the next leg down in the Global Depression will be a hyperinflation. Here's why it will happen, how it will happen, and what to do about it. - Gonzalo Lira