Archive - Jul 28, 2011 - Story

As ES tumbled to 1285, there is a good reason why it was instrumental to halt the drop because should the 200 DMA in the S&P get taken out, at about 1284, then say hello to the next support which is at the March and June swing low trendline of 1258. Then again, in order to get QE3, which by the way is the goal here once all the smoke and pizza boxes clear, the market does need to plunge as has been warned again and again. Alas, it has to drop by another 20% from here. So, all those who traditionally keep buying the dip in advance of anticipated Fed intervention sooner or later will have to eat their losses. And considering that America may be bankrupt as soon as Tuesday unless the Fed sells its gold, it will certainly be sooner. So as Asian dealers scramble, and Europe wakes up (can UniCredit make it a trifecta of trading halts? Why of course), with America to follow thereafter realizing its Q2 GDP was just 1.7% (and to be revised to 1.4% in 2 months), the race for QE3 finally is on with just one month until Jackson Hole.

Tonight just got that Lehman Brothersy feel to it. After hours of delays, Boehner just experienced a supreme dose of humiliation after he announcing he would cancel tonight's much delayed vote on his deficit plan after apparently being unable to get the requisite 218 votes to pass his plan though the Congress (forget that it would never pass Senate or the President). Boehner has said he will instead hold an emergency meeting with members Friday morning but the damage has been done. The result: the markets are now in absolutely terrified mode, with ES just plunging by over 12 points on the news, the dollar hitting fresh post March 17th lows against the Yen following the Fukushima explosion, and overall total chaos appears to be on the horizon. And with Europe about to open, all hell is about to break loose. Something tells us that the deer in headlights will be on prominent display tomorrow, not to mention the bear cavalry.

The Debt Ceiling Reality Show approaches its grand finale in the next week. The world breathlessly awaits the shocking conclusion. The debt ceiling will be raised. The world will be saved. Wall Street will rejoice. Americans can focus on the important stuff again, like Casey Anthony’s upcoming book, who will win this week’s Toddlers and Tiaras pageant, and the latest app created for their iPads. Based on my observations over the last few weeks, I’m absolutely sure that 90% of the politicians in Washington DC would lose on Are You Smarter than a 5th Grader? What the public doesn’t see is the rooms filled with PR maggots in the bowels of Congress generating talking points and testing them in over night polls of the public. Their sole purpose is to generate a message that will convince the public the fiscal debacle is the fault of the other party. The goal is to gain an advantage in the next elections. The long term future of our country is unimportant to the soulless autobots that get paid to misinform and mislead the masses. Leaving unborn generations with an un-payable debt so we can selfishly cling to benefits promised to us by corrupt politicians who only made the promises so they could be elected, is the ultimate in egocentric myopia.

Yesterday we reported of a dramatic dispersion between the just maturing July 28 Bills and the "post default" August 4th version of short-term funding. We also suggested that this is probably a spread that should be promptly collapsed as in the very unlikely event there is a default, the last thing on your counterparty's mind will be trying to collect the several MMs owed to him. Well, the July 28s matured today, and the spread appears to have evaporated. Not so fast. Those who so wish, can still put on the compression trade, although not using plain vanilla bonds, but CMBs instead. In fact, as of today, traders can capitalize on the Treasury's D-Day, with the spread between the August 2 and August 4 CMBs rising from 5 bps to 11 bps in 2 days. Now the reason why this trade, with lots of leverage would be ideal, is that, as mentioned above, if the US does default, Repo desks and Prime Brokers will have much muich bigger problems, and two, as we pointed out, it will imminently become "uncovered" that the Fed has a secret stash of cash, up to the amount of about half a trillion, which may easily carry the Treasury through the new year, in which case the spread will immediately collapse. Of course, we could be wrong, and everyone who plays the compression will blow up in an epic supernova that will make Boaz Weinsten's legendary basis trade annihilation seems like amateur hour.

Many deep dilemmas face investors of Gold & Silver. First and foremost we feel an urgent need to defend ourselves against a crippled corrupted USDollar. The level of debilitation cannot be adequately put in words, as it has lost perhaps 70% of its value just since 1980 when the Jackass entered the workforce after years at the university. The USEconomy cannot be rebuilt or sustained on bond fraud, debt auctions covered by the printing press, endless war, phony accounting, outsourced industry, home equity extractions, rigged financial markets, constant deception on economic recovery, falsified economic statistics, and pursuit of the next asset bubble. The end game is fast along, gaining traction as much as public attention. The remedies put in place to date have centered on additional currency debasement of all major currencies, extension of sovereign debt when its burden is already at a staggering level. The rescue of the bank assets, largely toxic from the bust in housing and mortgage, has resulted is widespread redemption of nearly worthless bonds or heavily impaired bonds. The consequence has been a rapid rise in the entire cost structure to the global economy, without the benefit of rising incomes.

Any time Wall Street tells you something, ignore it. Case in point: the historical "consensus" forecast of Q2 GDP. We have presented this chart before, most recently as pertains to Q1 GDP, although when it comes to unmasking Wall Street's broad incompetence, repeated showings never hurt. And the chart speaks volumes not only to just how much more "insight" those experts have into the future of the economy (none, but that doesn't prevent them getting multi-million bonuses at the end of every year), but also that any hopes of a Q3 and Q4 economic rebound will be imminently dashed. Below is the dramatic(ally wrong) history of Q2 GDP consensus forecasts, one day ahead of the first estimate of the official data release which will now most likely come well below a contractionary level in real terms.

By now some readers may have read ludicrous stories about the Fed coining multi-trillion precious metal coins in a way to loophole the debt ceiling situation. Granted, this plan is so far beyond ridiculous that we have not wasted the time to comment on it. That, however, does not mean that the Fed is powerless to assist the Treasury in a modestly long-term term fix of the debt ceiling fiasco. In fact, as Stone McCarthy's Raymond Stone observes: "The Fed does not want to be a player in this debt ceiling/potential default debate. It didn't want to be a player in the Bear Stearns debacle, or the Lehman situation. But when push comes to shove the Fed will do what it can to avoid a default." In summary there are three avenues that the Fed can pursue in order to help Tim Geithner prolong the cash illusion modestly longer. The three options for Bernanke are to i) book profits; ii) prepay expenses and, yes, iii) sell gold. Combined, these three approaches could squeeze out well over half a trillion dollars, giving the Treasury breathing room not only past August 2, but potentially into 2012! That said, "The Fed would not want to advertise to Congress the possibility of delaying default. It does not want to take Congress off the hook on increasing the debt ceiling." But it will, if it has to, and the end result will be a delay potentially of up to a month. And if it means selling off the Fed's gold, so be it.

Update: according to Eric Cantor's spokeswoman Laena Fallon the vote will be only delayed until later on tonight.

Boehner just informed the media that the congressional deficit plan vote will be delayed, presumably because Boehner has not amassed the requisite number of votes. The market reaction is fast and furious: ES dumping 6 points immediately after the notice which means that the delay could now cut into August 2, and there may not be a resolution until Tuesday absent a "grand compromise" plan, which we do not see happening without either party getting crucified by their voters.

Retirement funds have become the ultimate fudgemaking tool of corrupt fiscal policy around the world. Treasury Secretary Tim Geither has been robbing federal pensions for the last several months in the absence of a debt deal, and several governments overseas have also stolen from retirees in order to continue financing their largess. Bottom line- if these bankrupt governments and agencies owe to retirement funds, they’ll stop paying whenever it suits them. If they have access to steal from the retirement funds, they’ll steal. We’ve seen several examples of this over the last two years, and we’re seeing more all the time. This is one of the issues that concerns me the most because I know how many people are completely unprepared for this eventuality. Even private retirement accounts are fair game in the political calculus… and it’s a simple matter of arithmetic.

Things are getting real. After all the bluffing, huffing and puffing by Geithner, the rating agencies, and anything with a pulse and a TV or radio pulpit has failed, the last trump card is coming down. While yesterday the Treasury informed that it would not disclose any details of its contingency plan, Bloomberg has just learned via a Treasury leak that the US government will give priority to bondholders. From Bloomberg: "The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official. The official requested anonymity because no announcement has been made. The Treasury has said about $90b in debt matures on Aug. 4 and more than $30b in interest comes due Aug. 15. Overall, more than $500b matures in August." And so it begins: while the Treasury has not yet pushed the big red flashing button, this leak is nothing but it latest and greatest bluff. It also means that America will, indeed default, next week, as the absence of a contractual payment is a default. And then we get into the fine print with the rating agencies whether or not X is default but Y is not. At that point however it won't matter: every form of intermarket liquidity will be permanently gone as Lehman will be a cherished walk in the park. Thank you Tim Geithner and your total lack of contingency plans.

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

Market Recaps to help improve your Trading and Global knowledge

When it comes to sellside research ideas (no matter how wrong) being mysteriously converted into official policy nobody, and we mean nobody in the world, is more effective at this "task" than Goldman. In addition to being a herd leader of all the other momos on Wall Street (with Deutsche Bank being dead last), what Goldman wants, whether it is QE1, QE2, or the final layout of the eurozone bailout package #2, Goldman gets. Which is why people actually do care about Goldman's research: not because it is right, it rarely if ever is, unless of course one gauges its success with the bonus pool for Goldman Sachs itself in which case it has been a massive success without fail, but because everyone in DC reads it as gospel, and whatever is advised is eventually implemented. Which is why even as we have skipped numerous analyses of what would happen to the US should its rating be cut, Goldman's is a must read, not the least because Goldman finally puts all those economic illiterates who compares a US downgrade to that of US and assume off the bat that nothing bad can possibly happen. Wrong. Just ask Jan Hatzius: "It bears repeating that no two episodes are alike – nor is any historical episode a close parallel to current US circumstances." And while even he admits he has no idea what will happen, he doesn't get paid by the blank piece of paper so the Goldman economist did have to supply 4 summary conclusions of what will happen when the US is downgraded, sometime over the next 3-4 weeks: 1. A drop in equity markets, but probably a modest one, 2. Some weakening in the currency, 3. A steepening of the yield curve and a cheapening of Treasuries relative to OIS, 4. Some weakness in the financials sector. In other words, "we have no idea, but it won't be good." We totally agree. The full note is below for those whose brains aren't petrified enough to assume that the Japanese downgrade is in any way remotely comparable to that of the US.

When it comes to the name John Williams, there can be only one. The status quo apparatchik who is the new head of the San Fran Fed is a distant second. Alas, it is his words that are more important today, as in a speech to the Community Leaders of Salt Lake City titled The Outlook for The Economy and Monetary Policy, he just made it clear that should the current re-re-recession within a depression accelerate, more QE/LSAPs are coming. To wit: "Looking ahead, we at the Fed will keep a very close eye on incoming data and adjust our policy as needed to work towards our two policy goals. If the recovery stalls and inflation remains low or deflationary pressures reemerge, then we may need to keep our very stimulatory policies in place for quite some time or even increase stimulus." And unlike Lacker earlier who admitted QE 2 had been a failure, Williams is a liltle more polite: "the Federal Reserve doesn’t have a magic wand that will allow the economy to get through a crisis of this magnitude unscathed." Translation: we have been improvising and we have failed although in the process we have made the rich richer, and everyone else as poor as they ever have been. Lastly, Williams appears to be a fan of the Boehner plan: "There is no question that we are currently on an unsustainable long-run path of federal fiscal deficits. It is essential that budget deficits over the next decade be brought under control." Funny that because it was none other than the Chairsatan himself who every time he is trotted before congress, says that stimulus has to come from a fiscal basis, not monetary. While Congress is obviously full of contradicting idiots, it is a little scary if the same can be said of the Fed as well too.

Systemic financial instability is spreading rapidly around the globe. Nobody knows the precise timing, of course, but if we consider the systemic causal forces at work, it seems the future is now: the next few months could see unstable markets gyrate wildly and unpredictably as the latent instability breaks out and plays out into the 2012-2013 timeframe. Here are a few of the structural causal factors behind the coming global financial instability.

Those interested in the apex of today's Congressional charade can follow the House debate on the Boehner plan live at the following link. It appears that the House does have enough votes to not only take up the debt-limit plan but to successfully pass it (has to be over 218). As a reminder the actual vote is expected to take place at around 5:45pm.