Archive - Jun 2011 - Story

Starting at 9pm Eastern, something lit up a fire under the Japanese Yen, sending all pairs, but specifically the USDJPY and EURJPY down sharply for no apparent reason. At last check the Dollar Yen was back under 79.85, the level at which the BOJ 3 months ago had to run like a petulant, crying child to its pedophile uncles from the G-7, begging for a rescue. The only mildly related news came out just prior when it was announced that China's net purchases of Japan debt hit a new record in April. From Bloomberg: "China’s net purchases of Japan’s long-term debt reached a record as the larger nation seeks to diversify the world’s biggest currency reserves. China bought a net 1.33 trillion yen ($16.6 billion) in Japanese long-term bonds in April, the biggest amount since records began in January 2005, according to data released today in Tokyo by Japan’s Ministry of Finance. The nation sold a net 1.47 trillion yen of short-term debt, the data shows. “As China tries to diversify its assets with its huge foreign-exchange reserves, it probably wants to have yen- denominated assets to some extent” in the longer term, said Tetsuya Inoue, chief researcher for financial markets for Tokyo- based Nomura Research Institute Ltd. “China has a strong trading relationship with Japan." If anything this would be dollar negative, not so much Yen positive... We will follow and update if anything is noted.

Two and a half years ago, Christina Romer, then still employed by the Obama administration in the position of Chair of the Council of Economic Advisers penned "The Job Impact of the American Recovery and Reinvestment Plan" - a report predicting the impact of a fiscal "stimulus" that took out $787 billion from the pocket of American Taxpayers (subsequently discovered to cost even more) and put that money...somewhere. We are not sure where, because according to a chart now made legendary for its complete failure to predict the future, it sure did not go into creating jobs. Below we present the original chart that made the January 10, 2009 presentation, and superimpose upon it the reality of the past two and a half years. It is simply stunning. And while we are here, and discussing the abysmal failure of QE2 (the impending arrival of QE3 notwithstanding), it is amusing to hear the whimpering of the likes of one Richard Koo, who is now claiming that all along the money from the Fed's monetary stimulus should have been invested in the form of a fiscal one. Well, Dick, below is the impact of your fiscal stimulus....AND it also includes the impact of $2 trillion in incremental monetary stimulus. Combined, both fiscal and monetary stimulus has now missed the worst case projection for US unemployment for 30 months running. Here is the simple truth: both monetary and fiscal stimuli are abysmal failures, when the economy is mean reverting to a state where it was hijacked from courtesy of 30 years of "great moderation" - and there is nothing that can be done to stop it. Correction: there is one thing - the Fed can destroy the dollar in its attempt to disprove simple physics. And, ultimately, it will.

Following the earlier note on the "irrational exuberance of QE3" at current conditions, Goldman does a one-two to the face of the long-only slow money crowd which are about to realize that what goes up the escalator, will go down the elevator, repeating that the next round of monetary easing "would require a notable further deterioration in the outlook to be considered seriously." As a reminder the only "outlook" the Fed keeps an eye out on is the 50 DMA of the Russell 2000.

As has been repeated on Zero Hedge many times, with the stock market just 15% off its post-Jackson Hole surge highs, the market continues to be irrationally exuberant that QE3 will come come hell or high water. No. That will not happen until all the mutual funds who have been holding for 2+ years realize that in order to get another heroin hit, some will have to be wiped out (thank near-record margin debt and record low cash holdings) before QE3 does arrive. The latest to confirm this is Goldman Sachs, which via a note just released by Dominic Wilson confirms our speculation that "QE3 optimism is excessive." Ironically, the only thing that will guarantee QE3 is a fresh round of significant pains which retraces the entire QE2 move higher. Nobody in the long-only community wants to hear it. Alas, it is the truth. As usual: he who sells first, will have a job tomorrow...

There is a great deal of uncertainty among investors about what the future of the U.S. economy may look like – so I decided to take a stab at what’s likely to happen over the next 20 years. That's enough time for a child to grow up and mature, and it's long enough for major trends to develop and make themselves felt. I’ll confine myself to areas that are, as the benighted Rumsfeld might have observed, “known unknowns.” I don’t want to deal with possibilities of the deus ex machina sort. So we’ll rule out natural events like a super-volcano eruption, an asteroid strike, a new ice age, global warming, and the like. Although all these things absolutely will occur sometime in the future, the timing is very uncertain – at least from the perspective of one human lifespan. It’s pointless dealing with geological time and astronomical probability here. And, more important, there’s absolutely nothing we can do about such things. So let’s limit ourselves to the possibilities presented by human action. They're plenty weird and scary, and unpredictable enough.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/06/11

Alas, the market still refuses to acknowledge that the S&P will need to drop below 1000 (and whatever the appropriate level for the RUT is) for Bernanke to greenlight QE 3 which will in turn send everything to the moon (better have those collocated algos ready and steady). Judging by the post-speech reaction, markets may finally be getting it, just as Bernanke is also getting that he is dealing with a heroin addict who will not settle with methadone (aka "extraordinary" and "extended").

You have read Dealbook's superficial (and practically dictated) defense of Goldman's subprime bet. Below we present David Fiderer's a vastly different perspective than the one shared by straight-to-HBO expert A.R.S., which provides a far more realistic perspective of what really happened with Goldman and its "big short."

With an hour of boredom to kill until the Bernanke announcement, and nobody trading anything until then, here is some afternoon amusement courtesy of the NMA which has taken Weiner's career suicide and made a, what else, cartoon out of it.

With less than an hour and a half left until the release of Bernanke's 3:45 pm prepared remarks out of embargo, one wonders if someone may have just purely by accident, and totally inadvertently broken the embargo, in advance of a speech that some see just as important as the Jackson Hole QE 2 announcement. And while the earlier announcement out Fed 8K distributor Jon Hilsenrath made it seem that there would be nothing QE 3-related at all out of Bernanke's Atlanta remarks, perhaps the Fed has finally remembered that the best monetary policy works when it actually surprising. Which incidentally may explain why there is a rather substantial amount of XLF July $16 call buying going on, to the tune of $1.4 million: the option-based bet for a run up versus down in financial stocks (which would be the primary beneficiary in any even remote QE 3 announcement) is substantially tilted to the upside, with a 4 to 1 bias in favor of the calls. Will these calls pay off massively, or will they all expire worthless very shortly: find out at 3:45 pm Eastern.

There is a curious email floating around (allegedly sourced here), which is supposed to represent a communication from France's La Banque Postale to its clients, notifying that beginning August 1, 2011, the bank will lower the weekly ATM withdrawal limit by anywhere between 33% and 50%. In brief, according to the terms of the of the bank's statement, the top tier of credit card holders, the Visa Premier, will see their weekly withdrawal limit reduced from €3000 to €1,500, while the next two tiers, MasterCard and Bleue Visa, will see their weekly withdrawal allowance lowered from €1,500 to €1,000. Lastly, the lowest tier will see its cash withdrawal drop from €1,000 to €800. Naturally if confirmed, this would not be a good sign as pertains to the bank's current liquidity situation: traditionally cutting the withdrawal cap is an indication of a substantial cash on hand scarcity. We hope some of our French readers can confirm or deny this peculiar development out of a country that has so far rarely made the "financial woes" headlines.

The Treasury just priced $32 billion in 3 Year bonds (CUSIP QS2) in another "strong" auction which was dominated by Dealers who took down 55.2% of the total amount, as they prepare to flip the bulk of its right back to the Fed, just as in last month's 3 year "strong" auction which as we noted yesterday, saw half of the Dealer takedown flipped to Brian Sack in 3 weeks. The yield dropped to 0.765%, just wide of the When Issued, and the lowest since November 2010, even as the Bid To Cover came at 3.279, a touch weaker than May's 3.289, and the 4th strongest BTC in the history of the auction. Indirects came precisely in line with the LTM average of 35.6%, with the balance, or 9.2%, going to Directs. The Indirect bid was actually weaker than the take down number indicated. As Stone McCarthy points out: "the Indirect bid declined to $17.8 billion this month from $18.9 billion last month That accounted for 17.0% of the overall bid, compared to a 17.8% average over the prior year. The Indirect hit ratio was close to average, but the smaller bid still left Indirect bidders with a slightly below average 35.6% of the auction." Overall another irrelevant auction as there will be at least 3 Year targeting POMOs before the end of QE2 in 3 weeks, meaning PDs will be able to flip the full amount of the OTR they don't want back to the Fed. When it will get interesting it toward the end of June when the distribution of POMOs across the curve starts getting sparse and then ends on June 30. As usual, look for CUSIP QS3 to be the most monetized CUSIP in the next two 2014-targetting POMOs.

The current situation may indeed be different from that presented by Long Term Capital Management, but it may be even more alarming, not less alarming. Due to the use of structured products and derivatives, hedge funds can take on hidden leverage above and beyond that which can be explained by polling prime brokers. Furthermore, illiquid structured products will experience a classic collateral crash when hedge funds try to liquidate these assets to meet margin calls or collateral "cures". Since 2000, assets invested in hedge funds have more than tripled to around $1,500bn. While on average leverage may appear manageable, some hedge funds - Amaranth to cite a recent example - employ high degrees of leverage. A potential source of a "great unwind" arises from a trigger event affecting highly leveraged hedge funds, and another potential source is systemic risk that effects a larger cohort of hedge funds.

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