Archive - Mar 2011 - Story

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 04/03/11

A month ago we reported that the state of Virginia has established a subcommittee to study alternatives in the case of a terminal "Fed" breakdown, and would propose gold as a sound alternative to the existing fiat currency. Now, the state of Utah has gone a step further and is actually voting, as early as today, on whether to recognize gold and silver coins, issued by the federal government, as legal currency, a move that would send a huge signal to the Marriner Eccles building that Americans have had enough of the Fed's dollar debasement. "The coins would not replace the current paper currency but would be used and accepted voluntarily as an alternative." Reports Foxnews: "The legislation, which has 12 co-sponsors, would let Utahans pay their taxes with gold and also calls for a committee to study alternative currencies for the state. It would also exempt the sale of gold from the state capital gains tax. The bill cleared a state legislative committee on Wednesday, the first of 11 similar bills in statehouses across the country to do so. If the bill clears the House, it would have to pass the Senate before the governor could sign it into law." Paying taxes in gold? Interesting. We certainly hope this was not highlighted due to being the only viable use of funds, as one would question the legitimacy of the entire proposal. Finally: "Attorney and Tea Party activist Larry Hilton, author of the original bill, said he doesn't foresee any roadblocks." We shall see about that, but in the meantime it is worth highlighting that the onslaught against the dollar is coming not only from China which as we reported yesterday is pushing to convert the renminbi to a global reserve currency, but from within, as more and more states realize that the viability of the dollar is now crippled, thanks to the Chairprinter.

All you need to know about how the market reacts to Non-Farm Payroll day in one convenient cheat sheet. Despite a gross cumulative surprise of 3,480,000 (jobs below expectations), and an average surprise of -27,000, coupled with a negative bias (0.53% negative surprise, 0.33% positive surprise), the market tends to have a bullish average return on payroll days of 0.14% (0.07% median) compared to 0.03% average on all other days. In other words, even if there is a miss tomorrow, which is highly unlikely, expect the market to "internalize" the news and come up with some completely idiotic explanation which excuses yet another stock ramp, which will only be avoided if nuclear war breaks out (and even then it is a toss up).

Time for our weekly M2 update. Presented, as usual, without commentary.

On one hand we have the Department of Truth about to tell tomorrow that NFP based on various seasonal and birth death adjustments increased by 250,000. On the other hand, we have Gallup which actually does real time polling without a procyclical propaganda bias. And Gallup does't have any good news: "Unemployment, as measured by Gallup without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January. The U.S. unemployment rate is now essentially the same as the 10.4% at the end of February 2010." And the one indicator that nobody in the mainstream media will touch with a ten foot pole: "Underemployment, a measure that combines part-time workers wanting full-time work with those who are unemployed, surged in February to 19.9%. This resulted from the combination of a sharp 0.5-point increase since the end of January in the percentage unemployed and a 0.5-point increase in the percentage working part time but wanting full-time work. Underemployment is now higher than it was at this point a year ago (19.7%)."

The Fed's insatiable desire to redo all the debt monetization mistakes of the Weimar republic continues. This week, the Fed's balance sheet hit a fresh all time high of $2.55 trillion, primarily as a function of increasing Treasury holdings. Not adding today's $7.2 billion POMO to the total holdings, the Fed's total Treasury holdings increased by $22.8 billion W/W, even as MBS posted their first decline in two weeks now that repurchases have materially slowed down as mortgage rates are substantially higher than at the start of QE Lite. This means that net of today's monetization, the Fed owns 7.2% more Treasurys than even the adjusted Chinese holdings of $1.16 trillion. Another key observation: excess reserves which have surged in recent weeks due to the unwind of the SFP program and due to the delay in liability catch up with Fed assets, increased by another $6 billion to a record $1,296 billion. And, naturally, only a hedge fund as big as the Fed would list $116.1 billion in other assets.

Now that the world is focused on the ongoing turbulence in the Middle East, Europe gets a rest from the financial hit men. While Europe ain’t the Middle East, there are lots of connections between the two continents. Many countries within the European Union have citizens with Arabic roots and backgrounds, and the Islam is a second largest religion. And lets face it, a few hours in a jet airplane and most Europeans can enjoy the tropical climate of the Middle East region. But there’s more, like the large trade and financial pacts between different Arabic and European nations. Take for instance the in ‘state-of-turmoil’ Libya, who holds large stakes in Italian blue-chip companies like banking giant UniCredit or defence company Finmeccanica. That makes Italy, already a EU member in financial chaos, a first potential victim of the unrest in the Middle East. But if we dig deeper in the EU/Middle East web, then we see more potential trouble ahead. The immense trading hub between Morocco and France, or the Turkish ‘gateway’ for Eastern Europe. No wonder few pundits are sounding the alarm bells. But hey, that’s the world we live in nowadays, with everyday a potential to chaos. If we take a step back, away from the heat, and have a look at the bigger picture for Europe, then the real problem and threat for Europe lies within Europe, namely Spain. Spain is for Europe what Florida is for the US: one gigantic foreclosure mess! And guess what, prices of Spanish homes are still dropping, just like oversees.

Something funny transpired over the the past two years in the Fed's interpretation of the critical Taylor rule, which Bernanke refers to in every testimony before Congress or the Senate: John Taylor, the creator of the rule, and Zero Hedge's nomination for Fed chairman (inasmuch as we need a Federal Reserve) said Bernanke is wrong in his interpretation of the rule, and if he had a proper interpretation the Fed Chairman should already be hiking rate. Yet leave it to Bernanke to believe he knows better what the rule is supposed to mean....than even its creator. From the WSJ: "Stanford University professor John Taylor, an outspoken critic of the Federal Reserve in recent years, has a new complaint: He says Fed Chairman Ben Bernanke is misrepresenting Mr. Taylor’s eponymous rule on interest rates." A brief reminder on the Taylor rule, which has been presented numerous times on Zero Hedge before: "The Taylor Rule offers a simple formula that economists often use as a
guide for the appropriate level of the federal funds rate. The formula
provides changes in interest rates depending on the level of inflation
and the output gap, which is the difference between actual gross
domestic product and the economy’s potential output. Depending on how
you define the rule (for instance if you give the output gap a lot of
weight in the formula or just a little, or if you use a projected
inflation rate or actual inflation) you can come up with different
interpretations of whether interest rates should be high, low or even
negative in a theoretical world." And an odd dilemma appears when one uses the original version of the Taylor rule as presented in 1993 or its 1999 revision: they provide totally different results: the first one says the Fed is wrong, the second one validates QE. Yet here is Taylor himself: "I did not propose or prefer an alternative rule in that 1999 paper, and it is hard to see how one could interpret the paper that way." So is the entire US monetary policy based on a rule derivative that is not even endorsed by its creator? The answer is a resounding yes.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 03/03/11

Investors who truly believe in the protective qualities of physical precious metals in a portfolio can own a variety of both bullion and investment collectible coins. Aside from the collectible coins' one-time exemption from confiscation and the belief they would again be exempt if such event recurred, other attributes of collectible coins are strong attractants to those who wish to hedge the metals market with a collectible coin in the same metal. A keen eye for changing trends in the values at which collectible coins trade, can bring to light some very appealing strategies.

You can go back through thousands of years of economic history and realize one fact: No country has ever printed their way to prosperity, all who have tried have wound up in hyperinflation, war or demise. How a guy can teach himself calculis, get into Harvard, become a professor at Princeton and NOT understand that - well it totally defies logic. The idiot was asked about the one time in our history that we had no debt. (Please don't think we balanced the budget during the Clinton years - for you can't debt (apply IOU's in the Social Security Trust Fund) as income.) Andrew Jackson balanced the budget and wiped away our debt by using non debt based money. Bernanke was asked about this during a recent hearing and he scoffed at it - his merit? Because it happened before the Civil War.

The chart below confirms what we have all grown to love and expect from the robotic algo stock trading bias, on days when volume does not exist. The trade here is obviously tomorrow's NFP, which is at a critical junction: should Bernanke wish to proceed with QE3 this may be his last opportunity to doctor the employment data to start a smooth transition toward further monetization expectation. Should NFP be a blow out, the next NFP report will be in April and it will have to be truly abysmal for anyone in Congress to buy that further monetary intervention is required just two months ahead of the end of QE2 in June. On the other hand, Bernanke wants stock prices to be as high as possible at the point when the transition to a QE-free environment occurs, assuming of course, anyone at the Fed believes the economy can ever exist without a daily dump of $5-7 billion.

It seems there is just one market which the Fed is either unable, or unwilling to manipulate: that of Portuguese (and generally peripheral European) debt. And for good reason. As the WSJ reports, Portugal started the year with about €4 billion in cash: "Fresh borrowing and other public transactions suggest Portugal has this
year likely increased that number to around €4 billion. The official
said in an email that the figure had risen but didn't elaborate." There is one small problem: the country has a €4 billion outflow on April 15... and has to pay down €20 billion worth of debt maturities and budget deficits through the end of this year! Where the country will get this money... nobody knows. Just BTFD. But not in Portuguese bonds. As the charts below show that is still the only asset that can't find a greater idiot.

That government projections are not worth the price of the paper (especially not in today's dis-disinflationary environment) they are printed on is no secret. As Zero Hedge recently demonstrated the margin of error in the most recent budgetary prediction can only be classified as insane. We wrote: "On February 28, 2001 George Bush said this about his 2002 Budget: “It
will retire nearly $1 trillion in debt over the next four years.”
Instead, US debt, which at that point was $5.7 trillion, rose to $7.7
trillion. $3 trillion rounding error? Also in the same budget, Bush
predicted a $5.6 trillion surplus over the next ten years, which would
wipe out all of America's debt by 2011. The latest debt figure was $14.1
trillion. A $14.1 trillion rounding error, or a nearly five fold
increase in "rounding errors" in a decade." So that's debt, what about budget surplus and/or deficit projections? It's not any prettier. And courtesy of the NYT we can now see this in an easy to comprehend animation. Following the jump readers can see just how endlessly upward biased projections tend to almost without fail deviate with reality (and unemployment rates as well). The best indication: the 2012 projection to the 2008 budget forecast callsed for a surplus. Now we are expecting a massive deficit. So why do we listen to these monkeys with typewriters again?

With everyone focused on municipal developments following the recent muni scare (although with muni outflows dropping to the lowest in months per the latest ICI data, it seems the panic may be over... of course this is at the expense of equity inflows as we had speculated some months ago) the latest news out of the Lucio Report are likely to be carefully scrutinized by the municipal investment community. According to Reuters: "Fewer U.S. states in February hit the mark on forecasting receipts from withholding taxes compared to January, a sign that a recent rebound in revenues may be slowing down, an economic newsletter said on Thursday." The summary from the report: "Around the country results were mixed," said the Liscio Report, which takes monthly surveys of states' tax receipts." Will this add more fuel to the Whitney fire? Look for inflection points in the MUB to find out.