Archive - Jul 28, 2011 - Story

There are some who may read the following article from Bloomberg titled "Banks Find Few Signs of Default Distress in Repo, Credit Markets" and be left with the impression that banks find few signs of default distress in repo, credit markets. These same people would then be very surprised by the chart below which shows that the overnight repo rate has more than doubled from 0.055% to 0.115%, or the highest in months, overnight. "Big deal, this is just a small jump" others may say. To those others we will retort that in a market as massively levered as the ON repo, which is a primary source of risk free financial institution funding in conjunction with the Reserve market (via the Fed's IOER rate), a relationship we have discussed extensively before. This simply means that the O/N GC-IOER spread is probably the most levered synthetic "instrument" in the known universe. Apply 100x leverage to the spread and the 0.06% change effectively wipes out capital buffer for an entity that was picking up pennies in front this particular steamroller, and has a firmwide leverage of 16x or a Tier 1 buffer of under 6%. Luckily, that same entity will quietly approach the Fed and using one of a plethora of secret and not so secret rescue mechanism, the Fed will merely transfer more electronic ones and zeroes backed up by future tax receipt claims to said entity's debit account and all shall be well, with nobody but the Chairsatan and the occasional Wall Street CEO knowing just how close we came to yet another systemic implosion.

Unlike the past last auctions in the current week, in which the 2 and 5 year both priced far weaker than expected, and saw a surge in Direct bidders absorb the absence of foreign demand, today's 7 Year auction was largely unmemorable. Granted, it did price with a 1.5 tail, coming in at a high yield of 2.28%, after with the When Issued trading at 2.265% second into the close, indicative of last minute weakness, but the other metrics were largely in line. The Bid To Cover came at 2.63, same as last month's, although well below the LTM average of 2.84%. The internals were stronger with Directs not surging as many has expected, and taking down just 9.26% of the auction, meaning Primary Dealers had to consume 51.2% of the auction. That left foreign bidders recycling their trade surplus to take on about 39.55% of the auction, better than last month's 32.17% but worse than the 12 month average of 43.33%. As noted: rather uneventful and on the weak side. What is more disturbing is that absent a debt ceiling hike, this may well be the last bond auction for a long, long time. And without more auctions, what will Bernanke monetize?

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During 2008, traitors like Hank Paulson were able to con most of us by saying that we risked a destruction of the financial system as an excuse to give the banksters and their allies a blank check. The con wasn’t in the notion that the financial system risked implosion as I believe that statement was most likely true. The con was that since most Americans don’t have a clue how the financial system works they merely became scared and reflexively agreed in their own minds that “well of course the financial system must be saved.” I on the other hand argue that the financial system is a ponzi scheme that enriches only the three enshrined parasite classes that dominate America today. The TBTF Wall Street banks, the military industrial complex and the politicians and lobbyists in D.C. that line their pockets. Everyone else gets sucked dry. I have spent the last three years of my life writing about this so that people understand when the next major crisis happens who is to blame and more importantly I want to instill in people the courage to look outside of this immoral money system to something that can move us forward when this one gets dismantled. I do not claim to have the answers I am just trying to get people to ask the right questions and get educated on how things operate. We the People must own the debate or it will own us.

We were pretty much speechless when we read this - it sure puts guarantees by Noyer, Trichet and all the other bureaumonkeys that the ECB does not accept just any collateral in perspective. From Presseurop.eu: "The most expensive footballer in history may now be used to guarantee the solvency of a Spanish bank. “Ronaldo in the bailout fund,” headlines Süddeutsche Zeitung. The daily reports that the Bankia group of savings banks, which financed Real Madrid’s acquisition of the Portuguese player, is now seeking to borrow funds from the European Central Bank. In response to the ECB’s demand for guarantees, Bankio are putting up… Ronaldo and the Brazilian Kaka, who also plays for the Madrid football club. In 2009, Real borrowed 76.5 million euros to pay transfer fees of 100 millions euros to Manchester United, and 60 million to Milan AC."

The latest meaningless headlines from White House spokesman Jay Carney:

• CARNEY SAYS NO REASON TO REPEAT DEBT DEBATE LATER THIS YEAR Except for retaining Obama's job of course
• CARNEY SAYS AMERICAN PEOPLE WANT COMPROMISE ON DEBT LIMIT Preferably the democrat compromise which saves a few quadrillion by not launching war on Mars?
• And sure enough there it is: CARNEY SAYS REID PROPOSAL REPRESENTS COMPROMISE 
• CARNEY SAYS SENATE WILL REJECT BOEHNER DEBT PROPOSAL
• CARNEY SAYS TREASURY WILL EXPLAIN HOW IT WILL MANAGE FINANCES
• CARNEY SAYS BOEHNER PLAN VOTE WILL NOT LEAD TO COMPROMISE
• CARNEY SAYS CONGRESS `CONTROLS OUR FATE' ON DEBT LIMIT
• CARNEY SAYS ONGOING DEBATE HAS HAD NEGATIVE IMPACT ON ECONOMY
• CARNEY SAYS `NO QUESTION' BOEHNER PROPOSAL IS `POLITICAL ACT'

Bottom line: algos now using every appearance of the word "compromise" in a headline as buying trigger.

For the record, I still believe that there will not be a breach of the debt ceiling and no overt default for the US. Things will be worked out in the nick of time, like they always are. However, the media is full of articles wondering about what ‘investors’ might do in response to a US default and/or credit downgrade. What will happen to Treasury prices? Will they go down as investors dump them en masse in response to a credit downgrade forcing interest rates to climb? It’s a big question and the most likely answer is “No, not really”. Partly because these so-called investors have been well-conditioned to believe that another bailout is always around the corner, but mainly because they have nowhere to go. The big money is trapped... The Treasury market is the largest and most liquid in the world, by far. For many big money funds there really aren’t any realistic options other than the Treasury market, and this present reality will limit the market reaction to any downgrade.

In the past week, almost every single sellside bank and their mother has released a report on "what happens to the US if there is a [default|debt extension|compromise|zombie apocalypse (if one believes Tim Geithner)]. Sure enough, here is Credit Suisse with its three scenarios. This is notable as it presents the binary outcomes for the stock markets as a result of what develops in Congress. The scenarios are: i) debt ceiling extension (market up 3%); ii) debt ceiling not extended (market down 15%); iii) default (market plummets by at least 30%). Of course, if there is really is a default it is game over for equity markets but that is a moot point. Either way, any report that has zero mention of the word gold when contemplating the impact of a US default goes straight into the garbage. Such as this one.

Obviously after its default, America will need to issue a "fresh start" currency to go with its "fresh start" balance sheet and "non-fresh start" group of thugs robbing this country's middle class blind de novo. Below we present the running contender for such "new currency" courtesy of William Banzai.

Below is the latest soap opera update per Bloomberg.

ISDA is getting nervous, or rather the same contingent of clueless "asset managers" who listen to ISDA as religiously as they listen to the rating agencies, is getting nervous. The boilerplate: "The following are responses to the most frequently-asked questions that ISDA has received in connection with a potential CDS Credit Event on US sovereign debt. The following does not constitute legal advice, and is subject in all respects to any determination that the ISDA Americas Credit Derivatives Determinations Committee may make in relation to CDS referencing the United States.  ISDA makes no comment on the likelihood of the events described in this Q&A." True - for the likelihood of any event happening, your best bet is to ask Turbo Tax Tim, and then multiply the answer by -1.

Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

And while our rating agencies still get their marching orders from Bill Gross and from Obama, in that order, China is not waiting. In a just posted Reuters interview, Dagong said on Thursday it plans a further downgrade as early as next week, even as politicians race against the clock to avert a ruinous debt default. Guan Jianzhong, Chairman of the Beijing-based Dagong Global Credit Rating Co, said he still believed U.S. lawmakers will clinch a last-minute deal on the U.S. debt ceiling, but the damage has been done. "We will react soon, probably next Monday or Tuesday. We need to look at whether they reach a compromise and the scope of the compromise, then we decide how deep the rating cut will be," Guan told Reuters in an interview in his spacious office. Naturally, this move will be aped by our own mockeries of a "rating" agency, leading to a very curious paradox: after all is it not the sock puppet at the top of it all - our very own distinguished tax evading eminence Tim Geithner himself who had the following exchange with Fox' Peter Barnes as recently as April: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?” Geithner’s response: “No risk of that.”  “No risk?” Barnes asked. “No risk,” Geithner said." So... when the US is downgraded in a week or so.... does that mean it is time to fire Geithner?

In possibly the most important underreported news of the day, Goldman and Citi were forced to scrap a $1.5 billion CMBS deal after S&P shocking refused to rate the notes. This unprecedented development left GS and C scrambling. Per BusinessWeek: "The deal won’t close today as planned because S&P is reviewing its criteria for commercial mortgage-backed securities and can’t provide a rating, the banks said in a joint statement through Business Wire. “Ratings are a condition precedent to closing and settlement,” Goldman Sachs and Citigroup said in the statement. “Standard & Poor’s had previously informed Goldman and Citi that they were prepared to rate” the transaction, they said." End result: $1.5 billion CMBS deal scrapped as it doesn't have the blessing of a rating agency.

As expected last week's 418K in initial claims  was revised higher to 422K, but the big surprise was this week's drop in claims to 398K on expectations of 415k. The market appears to relish the fact that the streak of 16 weeks of 400K+ prints is broken, although that is quite amusing as next week's upward revision will mean the 400k+ streak will continue. Although one should let the market have its pyrrhic victory for the day. What was truly amazing is that Non Seasonally Adjusted claims plunged from 470K to 366K, a 104K move in one week! Once again the BLS lets everyone have a chuckle on their behalf. The main reason for the drop in claims was New York and Minnesota, which saw a decline in claims of 17,377 and 10,352 due to i) Fewer layoffs in the education related services, transportation, and other service industries and ii) Fewer furloughs in state government. There was also some good news in MI and OH, which saw 7K and 5K drops in layoffs due to "Fewer layoffs in the automobile industry." Offsetting the weekly improvement in these states was the surge in California claims by 20,813 due to a "Return to a five day work week" and a spike in Georgia claims by 6,567 due to "layoffs in the manufacturing, trade, service, and construction industries." Those on extended claims reversed their decline and increased by 62K in the week ended July 9. Lastly, continuing claims came worse than expected at 3,703K on expectations of 3,700K, an increase from the unrevised 3698K but a drop from the naturally upwardly revised 3720K.