Archive - Sep 2010 - Story

It has been a while since Iceland's unpronounceable volcano shut down European airspace for a week. This could be about to change, because as FromTheOld demonstrates, the seismic activity at the base of Bárðarbunga stratovolcano, which also happens to be the highest mountain in Iceland, has picked up materially over the last 48 hours. As a reminder (courtesy of Wikipedia), Bárðarbunga “The largest lava flow in Iceland and the entire earth from a single eruption is originated from Bárðarbunga about 8500 years ago (causing mass extinctions)." Have we come down to this? A supervolcano demanding the sacrifice of a former FRBNY demagogue and current Napoleon Dynamite Ph.D. lookalike or threatening another, much more vicious, lock out of Europe?

The ECB has announced that for the week ended September 24, the Fed's much more impotent European cousin has purchased €134 million in sovereign bonds under its Securities Markets Program. This compares to an increase of €323 million in the preceding week, and €237 the week before that. While the ECB does not provide the breakdown of the actual bonds purchased, one can be certain that the names of Ireland and Portugal featured prominently in the trade tickets. And even as the ECB is caught between a rock and a hard place, knowing full well it would like to resume to bond purchases to the multi-billion level seen at the beginning of the Euro crisis, such a move would infuriate Germany - as the WSJ highlights: "Elevating [purchases] back up to several billion euros a week would likely
spark renewed opposition in Germany, where both the central bank and the
public were against buying government bonds, Mr. Annunziata says. In
addition, he says, the ECB may want to "keep up the pressure" on
governments to stick to their austerity pledges." Yet even at the moderated pace of sovereign debt monetization, the holdings by the Eurosystem of securities held for monetary policy purposes increased to €122.8 billion. What is not included in this number is the hundreds of billions in capital pledged directly to host banks in exchange for covered bonds, bankrupt stocks, beads, and other worthless objects which Jean Claude Trichet seem to believe are worth 100+ cents on the dollar even in an apocalypse case.

CNBC (the infinitely more credible European edition) has run a stunning interview with Cazenove technical strategist Robin Griffiths in which the banker discusses such taboo items as the Plunge Protection Team's intervention in the market for the month of September in a last ditch effort to keep stocks from tumbling following the horrendous August performance. First Griffiths dissects POMO: "One of the reasons [for the surge] is POMO: what happens is the Fed buys Treasurys off the banks, the banks put the money into the market...That amount of money turns the algorithms up, then all the algo trading hits the market. Real life investment managers are not doing this buying. They know that equities are for losers." And the stunner: "The S&P is being effectively goosed up by the Plunge Protection Team - they can keep doing this for a little bit longer... But according to me the April high will not break...as...all of those Keynesian stimuli did not work." As for bonds: "There is an old saying, don't buy the Fed - yields will go down. Even now you should be buying bonds and not equities. The bubbles never burst when wiseheads in the media tell you it's a bubble that's gonna burst, they burst when they've given up on that and tell you this time it's different."

Today’s trading activity will be dominated by options expiries. Gold prices are likely be pinned near the 1300 strike because of the large open interest there. For a more extensive snapshot of the pin risk please refer to the tables below.

• Last week's key story , conveniently buried late on Friday: "Three Wholesale Credit Unions Nationalized As US Securitizes $50 Billion In Legacy Toxic Assets; Failure "Sweep Under The Rug" Friday Just Got Real" - (Zero Hedge)
• From media shy to publicity whore, book-talker extraordinaire, David Tepper is now everywhere (New York Mag Profile)
• China Imposes a Steep Tariff on U.S. Poultry (NYT)
• Gold is the final refuge against universal currency debasement (Ambrose Evans-Pritchard)
• Japan Looks At $55bn Stimulus Package (FT)
• Fed Relative Value Model for Treasuries Showing Diminishing Market Returns (Bloomberg)
• Wolfgang Munchau on why the European Rescue Facility (EFSF) is one
  bid CDO, and would collapse immediately if France is downgraded  (FT)
• Eurozone banks face test as loans expire (FT)
• Interview: Marc Faber on the Federal Reserve and Hyperinflation (Seeking Alpha)

• Asian stocks rise to five-month high on US capital goods.
• Brazil crops shrivel as Amazon dries up to lowest in 47 years.
• Europe’s central banks halt gold sales; run of large disposals ends.
• Euro trades close to 5-month high against dollar, buys $1.3469.
• Eurozone annual M3 money-supply growth grew at a 1.1% in August vs. 0.2% in July.
• German business confidence rose unexpectedly in September.
• Germany backs tough EU deficit rules.
• Gold may advance to record on weaker dollar; Silver climbs to 30-year high.
• Japan said to consider up to $55B extra stimulus as recovery slows.

Boring day, with just Dallas Fed on the roster.

Ireland wakes up to some very ugly news this morning: "Moody's expects a continued asset quality deterioration in the loan book of Anglo Irish that will require further government support for the bank's liabilities," says Ross Abercromby, Vice President and lead analyst for Anglo Irish at Moody's. The rating agency believes that the novation of the deposits into the FB could increase the government's options to share the burden of such support with other creditors that remain in the ARB. Without an explicit government guarantee for senior unsecured note holders, Moody's believes that the ratings for these instruments need to incorporate this greater marginal risk. While Moody's considers the likelihood of the government not supporting this debt to be very small, this risk has been reflected in the three-notch downgrade to Baa3 and will continue to be a focus of the review for possible downgrade. Moody's expects to receive further clarity from (a) the Irish government's upcoming announcement of further details of its plans for Anglo Irish over the coming weeks, and (b) the European Commission's verdict on the proposed restructuring. Until such clarification is forthcoming, Moody's review for possible downgrade will continue. "In the absence of explicit government guarantees, the senior unsecured debt ratings could be further downgraded into sub-investment grade," says Mr. Abercromby.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/09/10

First one, now all. Just as we predicted - fan: meet feces.

Something funny (and quite revolutionary) happened during the CBGA's (Central Bank Gold Agreement) year ending this Sunday - the group of 15 signatory banks sold a mere 6.2 tonnes of gold, a massive 96% decline from the year earlier, according to provisional data.This means that unlike in the past, when it was central banker prerogative #1 to sell some gold and every year just to keep all the longs on their toes, this year the trend has finally changed. As the FT reports, "the sales are the lowest since the agreement was signed in 1999 and well below the peak of 497 tonnes in 2004-05." And yes, we do love the FT's brilliant summation of the change in mindset: "In the 1990s and 2000s, central banks swapped their non-yielding
bullion for sovereign debt, which gives a steady annual return. But now,
central banks and investors are seeking the security of gold." Hm, when all of Europe (as well as America) is a smoldering heap of bearer bonds that will never get paid, and China is putting up a building today, only to blow it up yesterday, and boast a GDP growth rate of one gajillion, the FT may want to change the bolded assumption. Back to the Captain Obvious narrative of the original article: "The lack of heavy selling is important for gold prices both because a
significant source of supply has been withdrawn from the market, and
because it has given psychological support to the gold price. On Friday,
bullion hit a record of $1,300 an ounce." So market zero supply, and demand that is growing exponentially, means higher prices, eh? All those Voodoo 101 classes, and Poison Ivy college loans sure are paying off in droves...

Some entertaining observations from BofA's Ethan Harris, who describes in detail why there are 500 billion reasons why gridlock would cripple the economy, and asks whether Obama is (or should be) more like Clinton or Bush in dealing with the approaching deadlines that will result in the first openly negative GDP print as soon as Q3 (good luck justifying thoat 10% EPS growth when the economy is about to decline). And just to confirm how bad it is, Jan Hatzius chimes in to explain why the economy will face a nearly 2% point headwind from inventory liquidation and negative fiscal catch up (think Cash For Clunkers gone viral) nearly every quarter in the coming year.

Takefuji Corp., the third largest Japanese consumer lender, was limit down on the Nikkei, and was subsequently halted, on reports the company is preparing to file bankruptcy as reported by Nikkei newspaper earlier. The news was also confirmed by the Jiji and Kyodo news agencies. According to Reuters, "Takefuji had 430 billion yen ($5.11 billion) in liabilities as of the end of June, the Nikkei business daily reported, adding that president Akira Kiyokawa would step down." Apparently the reason is that according to Japanese "consumer protection" banks are limited to the paltry 20% they can charge for interest: "Japanese consumer lenders have been struggling to cope with regulations lowering the rates they can charge on loans as well as claims for reimbursement for past interest deemed illegally high by a court ruling in 2006. In June a new set of regulations cemented the interest rate ceiling at 20 percent, down from 29.2 percent, and limited the amount an individual can borrow." Nonetheless, the filing will likely not be a major surprise as even Moody's appears to have been on the case.

Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat. After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La.

My last post "Correlation of mortgage rates with real housing prices: how increasing inflation could affect housing prices", raised some questions. I didn't have the chance to respond to them. But before I do, let me go back to the original purpose of the article. I asked the question, "What could happen to real estate in the event of higher inflation?" If inflation shot up from 1% to 7%, what would happen to the real value of your home. My thesis was: you're screwed. You will lose what little equity you have and real housing prices could drop by as high as 50%. - Taylor Cottam