Archive - Jun 23, 2011 - Story

Step aside IMF, China is now in the driver's seat. Officially.

That the Fed's balance has hit another record high (and will do so for at least two more weeks) should come as a surprise to nobody. After all, when something is at a record and grows relentlessly, it is pretty safe to say next week will be another record. That said, there were several curious observations in this week's H.4.1 update. First and foremost is that the "other Fed assets" category just hit an all time high of $132.7 billion. This category, which is now larger than the GDP of Kuwait, is apparently so comprehensible and transparent to the hoards of FOMC precleared journalists, that for the second meeting in a row, nobody feels like asking a question about just what is contained in this asset class. We also hope that nobody attempts a correlation between the Other Fed Assets class and the S&P. Another notable thing is that as we suggested back in January, the amount of MBS prepays continues to drop and has slowed down to a trickle. Elsewhere, the Fed's excess reserves are once again back to chasing Bernanke's expanding asset class, with over $40 billion more in cumulative asset expansion since the start of QE Lite, than excess reserves. Lastly, looking at the Fed's custodial treasury holdings, there was another small decline in USTs held in proxy by the Fed: the first decline in 4 weeks, since the May 25 second biggest historic drop, discussed previously on Zero Hedge. Aside from these, it was smooth sailing for the Fed, where the average maturity of SOMA holdings declined just modestly from 61.6 to 61.5 months.

"Given the current state of things, I'm sure there are a lot of people deliberately deciding to adopt a low profile, politically or socially. A lot of this has to do not so much with politics but what your neighbors or your coworkers will say about you, right? If you tell them something that is actually happening in the world, you will be labeled a conspiracy theorist; they’ll look at you as if you're crazy. But what about the activists? At a certain stage, the great mass of people will look around for leadership figures. When the economic crisis comes, they’re going to want someone to tell them how to get out of it. They’re not going to know the answers themselves. The question is, will there be activists, leadership figures, proposing the right solutions – and how soon will they come along?" Edwin Vieira

Our friends at Themis Trading have put together another quite fascinating white paper which makes a disturbing observation: on an intraday basis, the widely watched market gauge indices such as the Dow Jones Industrial Avereage, the S&P 500, the Nasdaq and the Russell 1000, are based on less than 30% of all shares traded, therefore conveying incomplete trading data. The reason, which is intuitively known by all who follow the increasingly more fragmented and more compartmentalized into dark pools and other various ATS venues, market topology is that as Themis says: "the market has become increasingly dominated by trading volume from arbitraging index, ETF, and other derivative movements versus the underlying equities.... Nowadays, in a world of microsecond trading, these indexes have become phantoms - they reflect some trades involving their components, but not the majority of them." In other words it is becoming increasingly obvious why in a world of HFT, ETF, algo, ATS and everything else penetration, there is now a scramble between the legacy exchanges to merge. The alternative is a slow, painful death due to terminal obsolescence brought upon from unregulated trading venues, which often times see the alternative trading system operator have exclusive firewall and gateway privileges, where anything goes and where such obsolete constructs as Reg NMS are routinely ignored: after all how can the SEC possibly track down the billions of unique trades each and every day and catch all the transgressions. Themis provides a solution to this skewed motivation for all traders to increasingly vacate the actively regulated open exchanges: "indexes should be calculated based on every trade involving a component that crosses the consolidated tape, which includes trades from non-primary exchanges such as BATS, DirectEdge and NYSE Arca."

The Fed's atrocious predictive track record is nothing new: just recall the famous clip that put together all of his horrendous calls on the economy in the pre-credit bubble years. Everybody knows how those turned out (the clip can be found here). Well cut the guy some slack, Fed apologists may say: after all how many could possibly foresee the X-sigma events that marked the 2008 market crash. Fair enough (and the answer to that question is many, but that is the topic of another post). So, in order to keep it apples to apples, from the stand of a post "Great Financial Crash", instead we have compiled the FOMC projections from the last 6 Fed meetings, in terms of GDP, unemployment and inflation projections: the three key metrics that the Fed tracks and attempts to estimate. We present the results below. They are quite self-explanatory.

Following the earlier general announcement that the SPR would sell 30 MM barrels of oil a lot of questions were left unanswered, such as what kind of crude will be sold, where will it be sold from, and at what price. The wait for answers is now over: The DOE has just released all the missing data. Per Reuters: "Under the terms of the U.S. sale that were issued by the department, the government does not plan to stagger the sale of the oil and will offer all 30 million barrels in one bid sale. The department will offer "sweet" crude oil from three of the reserve's storage sites: Bryan Mound and Big Hill in Texas and West Hackberry in Louisiana. The oil will have a base price of $112.78 a barrel, a spokeswoman for the SPR said." Which does not however mean that this is the price at which the oil will be sold: "Traders can bid above or below the "Base Reference Price" of $112.78, which is derived from the last five days of trading of Light Louisiana Sweet crude oil, as assessed by energy pricing agency Argus. Companies will submit their bids for the oil through a special department website. Delivery of the oil to the winning companies would take place over the month of August. Winning companies would pay for their oil during the month after the crude is delivered." Which simply means that China will convert quite a bit of America's trade deficit from dollars into oil.

Well now things are really getting downright exciting. From GOP House majority leader Eric Cantor "We are being asked by the Obama Administration to approve a debt limit increase. While President Obama inherited a bad economy, his overspending and failure to enact pro-growth policies have made it worse and now our national debt is currently more than $14 trillion. House Republicans have made clear that we will not agree to raise the debt limit without real spending cuts and binding budget process reforms to ensure that we don’t continue to max out the credit card. One option to ensure that we begin to get our fiscal house in order is a balanced budget amendment to the Constitution, and I expect to schedule such a measure for the House to consider during the week of July 25th. I have no doubt that my Republican colleagues will overwhelmingly support this common sense measure and I urge Democrats to as well in order to get our fiscal house in order."

Good afternoon. Quick synopsis of macro-thoughts. I’m not used to writing market comments or market updates anymore given the all things government and policy impacts on markets. It seems too often that it was as simple as the Treasury is selling the Fed is buying. And that was it. Simple. Whatever the reasons, there are implications of today’s bizarre events. There are lots of views which can be observed by schizophrenic price action in markets today. Let me share mine.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 23/06/11

Once upon a time, it was fascinating to watch crazy algos go nuts and send the price of any given stock soaring a few hundred percent higher or lower however briefly, then watch as the horrified exchanges come in right after and cancel all trades in hopes of eradicating all signs that the market is now a busted backdoor parlor in which Toby Maguire could make trillions if only hooked up to the Fed discount window IV drip. Now it is like watching a donkey show on infinte rerun. Sad is the only word that can describe it. Yet like true donkeyshow rubberneckers, we present the latest and greatest blatant algo gone wild, as usual courtesy of Nanex: "On June 21'st the stock CNTY ratcheted violently in three cycles within a six minute period, taking the price (in the first and second cycle) to over 100% of it's price just minutes prior. Within fifteen minutes the price had returned to it's previous trading level. As evident by the sheer volume of canceled trades (shown below), this was not normal market behavior and while the majority of these trades were canceled, many were not, raising even more questions."

Somehow the fact that Greece has "reached" a deal on its austerity plan is supposed to be good for 100 pips on the EURUSD even though this is not news, and has been priced in for a long time. Furthermore it does absolutely nothing to dampen the fear and loathing that this plan will be met by the broader Greek population. But with markets that have absolutely no liquidity and monkeys controlling the buy and sell algos, one can only sit back and laugh.

Domestic Monetary Policy and Technology Subcommittee Chairman Ron Paul is currently holding a hearing on legislation calling for a full audit of U.S. gold reserves. H.R. 1495, the “Gold Reserve Transparency Act of 2011,” calls for an audit by the Treasury that gives a full and thorough accounting of the U.S. government’s gold reserves, requiring an inventory and assay of the gold reserves. The Treasury’s audit is subject to independent review by the Government Accountability Office, allowing them access to any pertinent records or locations, including Fort Knox. "The Treasury Department has been less than transparent with the results of its gold audits,” Paul stated. “It is asking the American people to trust that all the gold is there, while not allowing site visits and not publishing all the data it holds on its audits and assays. Since most of this gold was originally seized from the American people in the 1930s, they deserve more transparency than a handful of financial statements."

Uber-Flip flopper extraordinaire Goldman Sachs just cut its Brent target  price a month after hiking its price target to $130, a month after cutting it to $105 (and just as we predicted two hours before the Goldman announcement). The latest number from David Greely: $105-$107/bbl. To wit: "The International Energy Agency announced today that its member countries have agreed to release 60 million barrels of oil from their emergency stocks over a period of 30 days. The IEA has coordinated this release, only the third in its history, in response to the ongoing loss of Libyan light sweet crude oil production and the impact that the resulting higher crude oil prices are having on the world economy. We estimate that a 60 million barrel release by the end of July has the potential to reduce our 3-month Brent crude oil price target by $10-12/bbl, to $105-107/bbl. 125/bbl." Full bizarro day report below, although all that matters is that Goldman is buying Brent again, after the "GS vs Client" scorecard now reads 3:0.

That’s two press conferences laden with softball questions from “the press” and two epic flops by The Bernank. Two extremely important things that came out of the disaster that was this event yesterday. First, I want to point your attention to the quote I pasted at the top. In response to the question of where The Bernank stood on monetary policy in light of his prior arrogant and cocksure statements a decade earlier about how the Japanese were being too passive in their methods he stated “Well, I'm a little bit more sympathetic to central bankers now than I was 10 years ago.” BINGO. That was far and away the most important thing he said the whole press conference. Why? Well, for several reasons. First, it was pretty much the only spontaneous unscripted thing he said the whole time. Second, because this is him basically admitting that sitting in an ivory tower telling others how to save the free world via monetary policy was a naive and idiotic thing to do (why people still believe in central banking, I mean planning, is beyond me). Talk is cheap and The Bernank now has had time to test his sad statist theories and guess what happened? He failed miserably in front of the entire world. By saying that he is “more sympathetic to central bankers” he is saying that theories are one thing and he now realizes that. This is HUGE. The Bernank has no clothes.

It is not only the Chinese interbank market that has found itself in a liquidity vacuum. A quick look at recent moves in European overnight lending rates shows that in the past two weeks the key Eonia overnight rate hit a multiyear high of 1.549%, which was rather disturbing because as Reuters points out "Factors related to the end of the first half of the year, when banks tend to lend less as they square up their books, also kept cash prices over two weeks near the European Central Bank's main refi rate of 1.25 percent, money market traders said." Of course, concerns about Greece are a far more prevalent factor in the closed loop that is liquidity evaporation. Which is why the Eonia plunge to 1.091% on Wednesday would have been surprising in isolation, but not if one considers that during yesterday's ECB Main Refinancing Operation (MRO), banks borrowed a whopping €186.9 billion in 7 day funding at a fixed rate of 1.25%. This is €50 billion more than what was borrowed in the past week, and as the chart below shows, is the highest since January when the market was once again concerned about European exposure to Portugal and Ireland (then subsequently forgot all its concerns for about 5 months).