Archive - May 31, 2011 - Story

It is no secret that to a deflationist like David Rosenberg bond yields have to go lower... Much lower. With the 10 Year flirting with a 2 handle one would think he would be content. Alas no. In fact, as he suggests in his piece from today, Rosie is convinced that the next iteration of QE will be nothing short of a redux of the 1961 initiative to kill the then gold exodus known as "Operation Twist" (recently dissected by the San Fran Fed). Incidentally it was the same Fed that compared QE2 to Operation Twist. It is only logical that Rosie would then suggest that QE3 would be nothing short of a complete clearing of the 10 Year bond in the market via the Fed in order to anchor expectations that the 10 Year rate would never go up (or reasonably "never") in the biggest gamble of all: that the Fed will attempt to both control its balance sheet and target Long-Term interest rates, a mission doomed to fail...But not like that will prevent the Fed from setting off on such a mission, especially following today's official confirmation of the Housing Double Dip (someone page Jim Cramer). As Rosie says: "Now it is doubtful that the Fed would ever target the long bond. In fact, the Fed may even want it to be higher in yield to ease the pressure on radically underfunded pension funds. While the Fed can either target its balance sheet, which it has been doing with these QE measures, or target interest rates, it cannot do both at the same time. So the next 'QE' will not be called 'QE' but rather something else — maybe Operation Twist 2 (OT2 — you heard it here first). The Fed would buy up all the 10-year notes needed to clear the market at the target "price" (yield). So depending on supply conditions and demand from the private sector, the Fed would basically lose control of its balance sheet, but if in return this policy is the one that blazes the trail for a turnaround in the housing sector and a durable revival in the economy, so be it." And keeping in mind that the true unspoken reason for Operation Twist 1 was to terminate the outflow of gold from the US to foreign bank vaults, we find ourselves agreeing with Rosie that an insane idea such as OT2 is precisely what the Fed would do to avoid a recurrence of the 1961 gold exodus (and attempt to give housing one last failed boost). As many birds would be killed with one stone, the only downside, that of a complete balance sheet implosion following OT2, certainly seems quite acceptable to a central bank now officially run by sociopaths.

Just because mega-radioactive water leakage was not enough. From Xinhua: "Operator of the troubled Fukushima No. 1 nuclear power plant found that oil has been leaking into the sea close to the facility, the Kyodo News reported Tuesday. The operator Tokyo Electric Power Co. (TEPCO) said the oil leaks were possibly from nearby oil tanks that may have been damaged in the March earthquake and tsunami, and it would set up oil fences to prevent the liquid from pouring into the Pacific Ocean." Oh, but they only discovered this now? Odd how it took nearly 3 months for those oil tanks to rupture and start spilling into the water. So in other words, not only is Godzilla coming, he will be more greased up than the Situation.

While the transitory (see, we can use that word too) surge in the EURUSD (and thus the S&P) may have already peaked, with the FX pair now at overnight lows, and likely soon to retrace the entire "bailout #2 rumor" spike, the one question few are asking is just how big of an impact is Germany's alleged (we have yet to see official confirmation that the WSJ story is correct) concession to a less dire Greek bailout #2 on the one instrument it is supposedly focused on, i.e., Greek 10 Year bonds. The chart below answers that question. From a high just over 16%, the 6.25% GGBs of 6/19/2020 have seen a "massive" plunge... of 32 bps. As of today, pricing in Bailout #2, the market is so antsy to get into Greek bonds that the 10 year is down to a whopping 15.843%. But at least the true focus on the "Greek bailout", the DAX and the RUT, are doing their thing.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

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Weakness in CAD evident after mixed Canadian economic data

So we move from one probably hyperinflation to another, quite factual one. As we disclosed last week, following its massive and surprising currency devaluation, Belarus has promptly plunged into hyperinflationary hell. The government, scrambling to avoid public unrest, which would likely promptly devolve into revolution and civil war, has just now decided to take reactive price freezing "measures" which will do absolutely nothing but accelerate the immediate destocking of anything and everything still available for purchase. From The Moscow Times: "Belarus on Tuesday froze prices on a number of foodstuffs as analysts warned that the former Soviet republic could descend into economic chaos and an IMF mission headed to Minsk to assess the situation." Ah, good old price controls. Failure is imminent, following which Belarus will introduce a mandatory coupon-based purchasing system now that the currency is for all intents and purposes worthless. Incidentally, those who still hold precious metals have the upper hand in determining what these are exchanged for and at what conversion ratios.

A few weeks ago we presented a chart from SocGen's Dylan Grice, which promptly went viral, indicating the ongoing dilution in the Roman silver denarius over the span of two centuries. The comparisons to the purchasing power of the dollar since the inception of the Fed were missed by precisely nobody. Yet one thing that was missing was charting the corresponding reaction in price levels for a key prevailing staple commodity, namely wheat, which was to antiquity what oil is to the world today. Well, courtesy of Paul Mylchreest's latest must read Thunderroad report, prepare to be stunned by another "comparative" chart which does an admirable job at predicting the future courtesy of the past, and which is about to go viral all over again...

You have to feel bad for Wall Street's eCONomists: suddenly their 2011 record bonus is in the hands of some very angry German taxpayers. But they sure provide for some good humor. Here is Goldman with spin du jour #2, which even it admits makes no sense: "We ... think a portion of the decline reflects this temporary [Japan supply] shock. That being said, the rise in the inventory component looks somewhat at odds with this explanation."

GERMAN FDP PARLIAMENT MEMBER SCHAEFFLER TELLS PAPER GREECE SHOULD LEAVE EURO ZONE (RTRS)

Next time, our advice: get confirmation

That average monthly benefit of $133.24 for 44.199 million people will help with the purchase of one third of a very edible iPad. Food stamp participation chart presented without further commentary.

The May Chicago PMI is out and contrary to the herd of clueless Wall Street idiots, better known in polite circles as economists, it came at 56.6 on expectations of 62.0, a collapse drop from the 67.6 before. This is the worst monthly drop since the economy imploded back in October 2008, and the second largest two month drop since 1980! A quick look at the New Orders index indicates it was the lowest since September 2009. But the good news: the economy is still in expansion... for about 1 more month.  The release says it all: "NEW ORDERS and PRODUCTION posted their largest declines in several years...but remained positive" and "INVENTORIES accelerated buildup" - thank god for artificial economic expansion. And from the respondents: "Fuel cost are going to have a major impact on business activity in a negative way that will slow recovery to a crawl." Uh, what recovery? Just you wait until QE3 is announced in 3 months. And elsewhere, the May consumer confidence completed the trifecta of bad news, coming at 60.8 on expectations of 65.4, and down from 66.6.

You knew it was coming...

The days of SAC's 3 and 50 fee structure appear to be rapidly coming to a close (as well as possibly the front doors to 72 Cummings Point road). In what is certainly a harbinger of capital flows from (instead of to for the first time in decades) the legendary and now infamous hedge fund, Institution Investor reports that "at least one well known investor in hedge funds has confirmed that he has requested to redeem his investment in SAC in light of recent reports of probes into the Greenwich, Connecticut-based firm. The investor, who requested anonymity, does emphasize that SAC “has the number one compliance department in the industry.” Nonetheless, recent reports swirling around the firm have led him to request to pull out his clients’ money. “We don’t want to be fickle,” says the manager. “We hate doing this. But, the government seems so intent now in getting them and there are additional SAC-related characters tainted. Some dealt with the same stocks at SAC." And so the expert network insider trading ring, first exposed by Zero Hedge nearly 2 years ago (on Part 1, Part 2 and Part 3) may claim its biggest victim, even in the absence of any criminal or civil charges against company executives: the last thing FOFs and LPs hate is uncertainty, and there is nothing like headline uncertainty that today, in one week, or one year, their capital may be permanently frozen courtesy of a few men in gray suits and a search warrant, which not even the best paid Gerson Lehrman consultant could have foreseen.

Despite Goldman's expectations of a +0.1% sequential move, and the broader economic lemming consensus of a modest -0.2% drop, the just released March Case Shiller housing data confirmed there is no end in sight for the housing double (or triple, or quadruple, or who cares: take out the Fed's $2.7 trillion and housing really has been in a non-stop plunge for 3 years now), missing expectations and printing at -0.23%. In addition the February data was revised even lower from -0.18% to -0.25% (expect failed career economists at Goldman and elsewhere to disclose this as a huge positive as it is really an increase). The Composite 20 dropped -3.61% on expectations of -3.4%. The press release says it all: "This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels." Cue QE3, 4, and so forth through QE 666, at which point we may see in uptick in worthless Bernankebux. And as we predicted earlier, bizarro day, with futures about to hit 3 year highs, now reigns supreme.

It appears that even a Stuxnet-crippled Iran can strike back. As the WSJ reports, "Germany summoned the Iranian ambassador in Berlin Tuesday after Iran temporarily blocked a plane carrying German Chancellor Angela Merkel from entering its airspace" in what has the making of a major diplomatic scandal. Merkel, along with a large German delegation was en route to India for an official visit, and had expected to get an uncontested green light to fly in Tehran-controlled skies, when the permission was granted... for over two hours. NDTV has more: "In an incident that could have serious diplomatic consequences, Iran temporarily refused to allow German Chancellor Angela Merkel's plane to enter its airspace on Tuesday. The plane reportedly had to circle over Turkey for two hours before being given permission to enter. The government aircraft was denied overflight rights in the early hours of Tuesday. The exact reason for the denial of overflight rights is unclear. But before the plane left Berlin on Monday evening, it was reportedly given permission by Iranian authorities. Germany along with the US and its other allies in NATO has long been at loggerheads with Iran essentially over its nuclear arms policy and alleged support to terror." Who could have possibly conceived that a country ostracized by the global community can possibly strike back. All we can say is that Air Force One better fly the friendly skies when it travels over the Middle East going forward or else it may be forced to discover just how efficient its flare and chaff Electronic Counter Measures truly are...

Today at 7:00 pm the House will hold a very symbolic vote on a $2.4 trillion debt ceiling increase. Symbolic because it is doomed from the beginning as every single republican will vote no. So why is it held? Supposedly it is to rekindle popular interest in the debt ceiling drama following several weeks of commercial interruptions (i.e., heavy lobbying), and to remind the public that America is still a "democracy." Below is Goldman's Alec Phillips with more: