Archive - Jan 20, 2011 - Story

A few days ago we reported that Newt Gingrich was pushing for legislation to allow states to file for bankruptcy, "allowing Them To Renege On Pension And Benefit Obligations." As we speculated back then "obviously what this means for equity investors in assorted muni
investments is that a complete wipe out is becoming a possibility, as
Meredith Whitney's prediction, which everyone was quick to mock and
ridicule, is about to come back with a vengeance." Sure enough, this most recent development in the states' path to insolvency was quickly ignored as it was not a dipping mushroom cloud that could be bought. Until tonight: the NYT has just rehashed the post in an article that would not only validate the Whitney thesis if true, but make a Cramer-Bove out of everyone who has been caught on tape in the past two weeks kicking and screaming that there is no chance in hell the carnage predicted by the scourge of Citigroup (and yes, back in 2007 everyone said that Citi could never fail either). From the NYT: "Policy makers are working behind the scenes to come up with a way to let
states declare bankruptcy and get out from under crushing debts,
including the pensions they have promised to retired public workers." Which means that up to $3 trillion in muni debt has a high probability of being GMed, precisely as we predicted: "proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid." Oh, and since all this constitutes an EOD, readers are strongly urged to re-read the primer on what pervasive state bankruptcies will mean for muni CDS (hint: the MCDX is cheap).

As usual, one chart is worth a thousand words, and a couple hundred billion in real, incremental dollars.

No...there was no leak this time. We promise.

There is no quite formal a confirmation of a problem than some petrified think tank or government center issuing a formal rebuttal. While we have only perused the 21 page report just issued by the Center On Budget And Policy Priorities titled "Misunderstanding regarding state debt, pensions, and retiree health costs create unnecessary alarm", this report's simplistic arguments and assumptions will merely stoke numerous far more erudite refutations, which will only make matters far worse, as the bogey has now been set. Among the pearls immediately sticking out in the report is the following: "Some who claim there is a state debt crisis have likened states’ problems to those in Greece or other European countries. There is no way directly to compare the state debt situation with a national government’s debt situation, but Greece’s situation was clearly far worse than the situation in the U.S. today." First of all, "some who claim", would mean the entire market: last we checked, muni bonds, ETFs and other derivatives are all trading at multi-year lows. Second, we haven't checked but we are confident that either this center or one of its just as worthless comparables, likely issued a report a year ago refuting "rumors" that Greece is insolvent. Look how that ended up. We will have more to say on this report soon, but for now we present it for our readers' amusement.

Precisely a year ago, in advance of the then farcical renomination of the genocidal maniac for his n^th term at the printer's, Zero Hedge nominated John Taylor of Stanford for Fed Chairman. Of course, in the subsequent theater in which the purchased cretinous zombies with Wall Street bank indulgence accounts known as Congressmen, it was a given that the Chaircreature would be appointed for his subsequent (and last) term. Yet in the intervening one year, Taylor's role in monetary affairs has only gotten stronger, to the point where BusinessWeek has just released an article titled: "John Taylor: The Republicans' Shadow Fed Chairman." Author Scott Lanman writes: "He doesn't have a vote in Congress. He doesn't sit on the powerful
Federal Open Market Committee. He isn't a member of President Barack
Obama's Council of Economic Advisers. Nonetheless, Stanford University's
John B. Taylor is considered one of the most influential economic
voices in Washington. Taylor's followers include the new GOP House leadership, the chairmen of
key House committees, Presidential hopefuls, conservative thinkers, and
others suspicious of Federal Reserve Chairman Ben Bernanke's
stimulative monetary policy and perceived alliances with Obama
Administration officials...Representative Paul Ryan (R-Wis.), who chairs the
House Budget Committee and speaks to Taylor every two to three weeks,
says he "is probably the leading voice with the highest level of
credibility in proposing an alternative view to the Fed's." We are delighted that as Bernanke's career is about to go down in flames for terminally destroying this once great country, there is a natural successor, who in our humble belief is worthy. Do we smell a mutiny in the Eccles?

Silver spreads continue to sell off on Thursday. So far, any theories that weaker spreads are ultimately bullish for the physical metal have to be viewed suspiciously. We spoke with a couple of traders on the topic and our revised possibilities list is as follows...

Today the republicans have proposed an amusing list of items to be cut from the Federal Budget, whose total amounts to just over $2.5 trillion over the next 10 years: an admirable if futile and pointless gesture. After all, never in the history of US government has spending been actually cut. And while among the proposals are such rhetorically pleasing if practically unfeasible suggestions as "Eliminate automatic increases for inflation from CBO baseline projections for future discretionary appropriations" and "Eliminate automatic pay increases for civilian federal workers for five years", some things the market may frown upon include: "Eliminate all remaining "stimulus" funding. $45 billion total savings" which means the Fed will once again be forced to pick up the slack, which it can courtesy of its recently disclosed third mandate. Yet what is shocking is the list of sundry token programs to be eliminated: we wonder just how many American are aware that currently the government's mohair subsidies amount to $1 million, that in addition to ECB FX swaps, the US actually has an international fund for Ireland (costing $17 million per year), that the USDA's sugar program whatever that is costs $17 million per year, or that apparently the US government spends hundreds of millions for not collecting unpaid taxes by Federal employees. One thing is certain: these cuts, if even implemented even one tenth of the way, will result in massive federal worker layoffs: probably not what the country needs as it scrambles to come up with every possible way to present data in a way showing the unemployment rate is tumbling.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/01/11

Google trading in afterhours is like a ritalin-fueled, amphetamine-infused roller coaster ride. After opening $25 higher, the stock subsequently turned red. And while results were great, the executive shake up which sees Eric Schmidt becoming Chairman and Larry Page CEO is spooking the stock. Perhaps that explains why GOOG has been one of the biggest insider sellers in past months...

When we first reported on the rumored "confiscation" of 1.5 tons (or is that tonnes?) of gold by deposed Tunisian surging food inflation beneficiary Ben Ali we joked that the next WGC update of Tunisian gold assets would be strangely lower by 23%. Once again, the Onion reality sets in as we uncover we were right. Dow Jones reports that "Tunisia's central bank this week said it held about 5.3 tons, but dismissed reports that the family of ex-leader Zine El Abidine Ben Ali had withdrawn the gold, saying the bank vaults were "under draconian security measures." Um, yeah, that's just off by the amount that Ben Ali is now desperately trying to eat...

It was just one month ago that the 2s30s hit a fresh high. In the meantime, things for Blackhawk Ben have not gone quite as QExpected: the 30 Year has just hit 4.6%, which with the 2 Year still remaining relatively flat, has led to some dramatic fireworks in the 2s30s curve which just hit a fresh 30 year high of just under 400 basis points. Ben is starting to lose control of tail end inflation expectations, and with that he will soon be forced to intervene much more forcefully in managing prices and yields: small POMOs like today's $2.2 billion which focuses on bonds with a 17-30 year maturity just won't cut it. We expect that either QE2+ will focus much more on the long end (in addition to MBS and Munis) or, in the least, the POMO group will need to reshuffle its purchasing schedule and buy far more tail end bonds than in current schedules.

After denying for months that surging food prices will eventually come to the consumer, hoping that instead food companies could absorb the margin drop, sellside research is finally capitulating to the reality of what is really happening in the retail store. In a note discussing General Mills, Goldman Sachs says the company raised prices on snack bars some 7% last week. Goldman further clarifies that "this reportedly followed a comparable increase taken by K on its snack bars in mid-December. In addition, KFT has reportedly announced a 6% increase on select Planters branded nut products. We expect more price increases to be announced by the food  companies in the coming weeks." Maybe, but the Chairman sure doesn't. And the Chairman is always 100% correct.

Who says the bears have a monopoly in explaining arcane economic concepts, from CDS to QE? The following cartoon from the geniuses at Next Media Animation depicts without any reservations the theater behind the theater, and shows what happens when your biggest creditor (after Ben Bernanke of course), comes to check in on you (in a stealth fighter jet)... Let the "Hu" jokes begin.

Marc Faber appeared yesterday on CNBC and explained why he is the latest adherent of the "reverse decoupling" theory, whereby the emerging markets are to underperform the developed countries. Of course, anyone who has seen the action in the Shanghai Composite in the past 3 months does not need to be convinced of this. Faber, then proceeds to share some perspectives on Chinese geopolitical ambitions in light of the Hu visit (thank you $19 billion China-US Boeing arrangement which has already cost 1,000 US jobs), and evaluates the impact of rampant money printing on the cost of living in developing countries. To the latter recent riots, and occasional revolutions, across Africa and the Middle East probably frame the issue best. Here is Faber's take: "My concern is this - we have money printing around he world, and in particular in the US, and that has led to very high inflation around the world, and in very low income countries, energy and food account for a much larger portion of disposable income than in the United States. So these countries are suffering from high inflation and that reduces the purchasing power of people, so I think that monetary authorities in emerging economies will have to tighten, or they will have to let inflation to accelerate, both of which are not particularly good for equities." Well, yes, but who cares: after all it is only a matter of time before someone on CNBC pitches the tremendous stock market return in such stunning examples of monetary prudence as Zimbabwe and Weimar Germany.

At the Sanford Bernstein conference several years ago Joseph Stiglitz spoke and said a good and healthy financial system is a small financial system. I couldn’t agree more. This is especially the case in a purely fiat money system. Money is too important to allow greedy children in expensive suits on Wall Street and dangerous academics at the Fed to play around with. I do not claim to know what the ideal money system is but I want to be very clear on this point. If we have a fiat system like today the banks should be the most regulated industry on the planet and operate like utilities. They are supposed to help the productive economy innovate and create wealth. They are not supposed to be parasites that suck the lifeblood out of the real economy and compose 16% of the weight in the S&P500 (only technology is bigger at 17%). Something is VERY, VERY wrong here.