Archive - Mar 2011 - Story

After serving as the inspiration for the Chairsatan's latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with "nearly 70% of the annualized issuance since the beginning of QE II
has been purchased by the Fed, with the balance absorbed by those old
standbys – the Chinese, Japanese and other reserve surplus sovereigns.
Basically, the recent game plan is as simple as the Ohio State Buckeyes’
“three yards and a cloud of dust” in the 1960s. When applied to the
Treasury market it translates to this: The Treasury issues bonds and the
Fed buys them. What could be simpler, and who’s to worry? This Sammy
Scheme as I’ve described it in recent Outlooks is as foolproof
as Ponzi and Madoff until… until… well, until it isn’t. Because like at
the end of a typical chain letter, the legitimate corollary question is –
Who will buy Treasuries when the Fed doesn’t?" Bingo, we have a winner. This is precisely the issue that Zero Hedge has been exposing over the past 6 months, and is the reason why the Fed is now locked in a QEasing corner from which there is no exit. To his credit, Gross attempts to provide an answer: "Someone
will buy them, and we at PIMCO may even be among them. The question
really is at what yield and what are the price repercussions if the
adjustments are significant... What I
would point out is that Treasury yields are perhaps 150 basis points or
1½% too low when viewed on a historical context and when compared with
expected nominal GDP growth of 5%." And the stunner: "Bond yields and stock prices are
resting on an artificial foundation of QE II credit that may or may not
lead to a successful private market handoff and stability in currency
and financial markets. 15% gratuities may lie ahead, but more than
likely there is a negative two-bit or even eight-bit tip lying on the
investment table. Like I did 45 years ago, PIMCO’s not sticking around
to see the waitress’s reaction." Translation: Pimco just issued a "sell" rating on everything.

If after years of explanations, and cartoons with bears, readers still have not quite gotten the grasp of how QE should work in theory (in practice the only thing about QE is how dramatically its intended and realized goals have diverged) perhaps this animation from the AP will finally put all doubts to rest. So for those still confused by terms such as "money printing", "open market operations", "outright monetization", and "Weimar hyperinflation", this brief and concise clip is for you. And once you see it, forget everything, because what QE2 has done has been precisely the opposite: rates have gone up, but the Fed does not care - as everyone now knows, the Fed's only true goal was to provide Primary Dealers with the capital to bid up stocks. End of story. Lastly, keep in mind, that the Fed is now implicitly funding the US deficit: as it purchases more and more bonds, the interest that is owed to the Fed is subsequently remitted to the Treasury as an actual revenue item, completing the world's most unprecedented Ponzi scheme constructed since the days of Rudolf von Havenstein.

Gold’s all time record nominal high yesterday was barely reported in most of the mainstream business and financial press today - slightly more online but there was little or no coverage in print. This is an indication that gold and silver remain far from the “bubbles” that some have suggested. Speculative manias and bubbles are characterised by mass participation and widespread enthusiasm and “irrational exuberance” by all sectors of society including the media and particularly the retail investor and the “man in the street”. The majority of investors and savers in the western world do not know what gold bullion is and could not tell you the price of an ounce of gold or silver in dollars – let alone in pounds, euros or other local currencies. The majority are unaware of the huge developments in the gold markets (only reported by specialist financial press) such as China’s emergence as one of the largest buyers of gold in the world (see news and our video below) and the fact that central banks and astute hedge funds are some of the largest buyers of gold in the world today.

The February ADP private payroll number came as usual above expectations, printing at 217,000 on consensus of 180,000, with the January number revised up from 187,000 to 189,000. The reason why the market appears to have not only ignored the better than expected data, but traded against it is the following line: "The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000)." Alas, checking in with NFP data validates the complete lack of ADP data credibility, which now joins NAR housing data, various diffusion indices and of course consumer confidence data on the trash heap of busted economic indicators.

• Qaddafi Vows Fight to ‘Last Man’ as Rebel Town Is Hit (NYT)
• Jon Hilsenrath: When Will the Fed Tighten? Bernanke Elaborates (WSJ)... hint: Never
• Home Prices in China Increase at Slowest Pace in Six Months, SouFun Says (Bloomberg)
• King Upbeat on Inflationary Pressures (FT)
• More Libyan crude cargoes sail from ports (Reuters)
• Trichet to Talk Tough on Inflation (WSJ)
• House votes for $4bn cuts to avert shutdown (FT)
• China Economist: Yuan 'Has Room to Appreciate' (WSJ)
• Propaganda bureau speaks: Why Obama is a pro-business president per Bill Daley (FT)

Markets mixed this morning with the U.S. up and Europe in negative territory as oil prices rose dramatically and Middle Eastern turmoil raged on. Bernanke spoke yesterday in the semi-annual Humphrey Hawkins speech to Congress, continuing to push Congress to tighten fiscally and to not raise the short term debt limit. While expressing concern for inflation risks, he remained confident that the outlook remains stable for the country. Monetary policy is likely not to tighten until unemployment is subverted and inflation stabilizes toward 2%. Bernanke’s presentation to Congress continues today. Data yesterday showed that manufacturing grew at its fastest pace since 2004, as the ISM Manufacturing Index rose to 61.4 in February v 60.8 prior, putting the U.S. in the head of the pack in the recent manufacturing upswing and causing a sell-off in treasuries. While we do not necessarily believe that a rapidly rising ISM will drive GDP growth above 3%, we do believe that Friday’s payrolls numbers will not echo the prior months disappointment and should print close to the consensus forecasts. Today’s ADP, however, is anyone's guess since the tracking error flipped late last year. The Fed’s release of its Beige Book to this afternoon will provide a more narrative outlook on the current economy.

With US, and now Canadian and Korean warships all converging on Libya, the developed world is certainly sending Tripoli a very loud and clear message. And with Libyan defense forces obviously a joke in comparison to the offensive being slowly mounted against it, one wonders what if any defense tactic the Northern Africa country has. The answer: oil. From Reuters: "Libya hopes tensions with Western countries over a popular revolt in the country do not reach the stage where the Tripoli government considers oil as a political weapon, a top oil official said on Wednesday. Shokri Ghanem, chairman of Libya's National Oil Corporation,
also told Reuters in an interview that Libya's troubles had
created the country's worst energy crisis in decades and Libyan
supply disruptions to world markets could push oil above $130 a
barrel in the next month if troubles persist." Yet as Saudi Arabia has used every chance to make it all too public, the kingdom supposedly has more than enough capacity to pick up the slack, should war break out and Libya go ahead and set fire to its wells. So it is surprising that the Arab League roundly rejected "foreign intervention" in Libya, putting US offensive forces in a tight bind, should it decided to proceed with an attack.

Despite what irrelevant US stock futures indicate, just like yesterday the true appreciation of risk comes from the Gulf region, where following yesterday's 7% rout in the Saudi index, today the drubbing continues. And for those who are confused why the Egyptian stock market continues to be closed, just take one look at what is happening with the Saudi Tadawul Index. Further confirming that Saudi Arabia is coming unglued are Saudi CDS which as we predicted a month ago, are well on their way to 200 and onward, last printing at 145, the widest they have been since July 2009.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/03/11

Ten days ago, when we first looked at the Libyan investment authority (its sovereign wealth fund), we asked "Which US Banks Are Managing Billions For The $32 Billion Libyan Sovereign Wealth Fund?" Based on Wikileaks data, it was disclosed that various US banks manage billions for the country which has just seen $30 billion of its assets largely frozen (although this is merely half of its total deposits). Obviously, we had "some" banks in mind, most of the variety whose directors believe they are above the law and can share inside information with criminal intent with utter disdain for the law. Now, courtesy of Marcus Baram of the Huffington Post we find that the usual suspects are, naturally, all here: among the key banks that serve as advisors and asset managers are Goldman Sachs (and not just anyone, but Jim "Revolutions are Bullish" O'Neill's GSAM, Citi and JP Morgan. The only question now is how long before we get some sort of public statement out of the likes of Lloyd Blankfein and Jamie Dimon: on the 22nd we said: "perhaps it is time for the US banks who manage billions in capital for the LIA, to step up." Now that they have been exposed by a third party, the CEOs should really take the hint before this escalates into a full blown PR disaster.

When a nation's top central banker says that even he is surprised the middle class is not far angrier at the bankers, you know the lithium consumption is surpassing Surgeon General RDA levels. From The Telegraph "In some of his strongest language yet, Mervyn King today claimed the fall in
households' living standards was the fault of the financial services sector
and he expressed sympathy that innocent families paying the price. "The people whose jobs were destroyed were in no way responsible for the
excesses of the financial sector and the crisis that followed," he told
MPs on the Treasury Select Committee. The people who are now suffering "did not get bonuses of the scale people
in the financial sector got". The financial crisis may have occurred
two years ago but, as austerity measures kick in, "the cost is now
being felt", he said.It remains "a big political problem", he added: "I'm surprised the real anger hasn't been greater than it has." What anger? Doesn't Merv realize Joe Peasant simply looks at the closing level on the Russell 2000 and says: "Damn, bitch, I am rich. And the economy is just humming along. It just makes me so happy" More importantly, if he continues with that kind of talk, King would be well advised to not get closer than 500 feet to any book repository.

It’s about time that this market started acting like a commodity and not a proxy for some ETF product traded by mutual fund managers. Call skew rallied to levels not seen in a long time as first dealers rolled their longs higher to let them hedge their gamma and then funds added to existing positions. It seems that the constant flow of GLD call selling that used to spill over onto comex has subsided. Perhaps we are entering a parabolic phase now that we are at all-time highs. We alerted readers to get long 2 days ago and remain behind our call of a top side of 1475-1550 in the next 8 weeks.

Now that all auctions from last week have settled, the real debt picture has emerged: as of February 28, total US debt was $14,194,764,339,462.64 (a settlement change of $57 billion on the day alone). As a reminder, the total debt limit is $14.24 trillion, or $100 billion away. Purists will interject that the total debt includes $52 billion in debt that is not subject to the debt limit, so in reality the total remaining capacity is $151 billion, although should total debt pass the ceiling, with or without the technicality, it will be pretty much game over. What is quite relevant is that the winddown of the SLF program is halfway completed, as otherwise the US would be in breach of the debt ceiling right now. Since there is another $95 billion outstanding on the SLF, which with the lack of any Treasury auctions in the coming week, has allowed the Treasury to issue an updated debt limit breach projection:"Today, Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following update regarding the projected dates by which the United States will reach the statutory debt limit:  “The Treasury Department now estimates that the United States will reach the debt limit between April 15, 2011 and May 31, 2011." Previously the projected breach range was expected to occur 10 days earlier. In other words, the Treasury is once again panicking, and sending the ball over to the Hill, to make sure politicians add another $1.5 trillion to the debt ceiling, which however, with $2 trillion in total issuance in 2011 will need to be raised just after the end of the new year.

There are those who would point out that without “velocity” we can’t have hyperinflation; and with 23% employment we aren’t going to get people spending, therefore there will be no velocity and thus no hyperinflation. I’d advocate that this argument be looked at again. First, the government is spending “funny money” that is, to some extent, creating some “velocity.” What is more important - money is a commodity as described in Part 1 - and therefore the more of a commodity that there is the less its value. Since the inception of the Fed in 1913 the dollar went to a value of .04 cents, 80% of that devaluation happened since Nixon took us off the gold standard. So if our dollar goes to a value of less than .04 cents, lets say .00000001 cent - we will have massive hyperinflation. Printing money is the road to .00000001 cents.

Today's market sell off was notable not only because it was the biggest single day percentage drop since November, but because it snapped the nearly unbreakable series of positive "first day of the month" returns. The biggest loser: the thousands of momo traders who go all in the last day of the month hoping to recreate the pattern. Alas, the pattern now longer exists, and today was the biggest outlier since June of 2010. That said, since the beginning of 2010, the bulk of the market's returns are still confined to the "first day" performance as nearly 15% of cumulative returns since 2010 are of that kind, and the rest is a meager 3%. It may be time for a major algo regime change.