Archive - Jul 2011 - Story

From an email just sent out by Morgan Stanley's David Greenlaw:

The NY Fed just asked primary dealers to come downtown today at noon to meet with Fed and Treasury Dept officials. We expect to hear them outline a contingency plan for next week. Details to follow.   

Here are some of the first sell-side and media perspectives on the abysmal Q2 GDP. And of course, nobody could have foreseen this huge collapse in the US economy. Nobody.

It's a good thing the BEA has two revisions to its GDP data or else someone would think that the government is purposefully fudging data. Below is a comparison between the Final Q1 GDP, which was released on June 24, and today's epic Q1 re-revision. From 1.9% to 0.4% in one easy Qe3 enabling step.

A simply unprecedented miss in Q2 GDP well below the consensus range, with the official number printing at 1.3%, giving it upside room for revisions in case QE3 does not pass, although at this point it is more than obvious that this number is goalseeked to give Bernanke the carte blanche to start more easing any second. This number follows an epic revision to prior data, with Q1 plunging from 1.9% to 0.4%. The GDP internals were simply appalling: Personal Consumption tumbled from 2.1% to 0.1%, on expectations of 0.8%! The US consumer is dead despite not paying mortgage payments. Lastly, US PCE Core printed at 2.1% on expectations of 2.3%. As we have been expecting since December, the US is on the verge of a triple dip recession within the bigger depression. With a deadlocked Congress, the Fed has no option but to do another monetary stimulus as seen by the surge of gold to near record highs on the data in the $1.625 range and the implosion in the USDCHF to fresh all time lows.

Amid Debt Battle, More Americans Say Economy Getting Worse (Gallup)
Treasury Faces Pressure to Detail Backup Plan (WSJ)
Debt-Increase Dispute Tests Boehner’s Power (Bloomberg)
U.S. Economic Growth Probably Slowed (Bloomberg)
IMF Board Holds Informal Board Meeting On EU's Greek Financing Deal (WSJ)
Why are we in this debt fix? It’s the elderly, stupid (WaPo)
France Seeks Rapid Adoption of Greek Bail-Out (FT)

Several important releases today, including the advance report for Q2 GDP, which consensus sees at 1.8% and Goldman is materially lower at 1.5%. A QE Lite POMO closes at 11:00 am. Chicago PMI and UMich consumer confidence round out the data, which will again be vastly inferior in market movery to headlines out of Europe and the US.

New IMF Chief Christine Lagarde has warned overnight that the global reserve currency status of the dollar is at risk due to the “worrisome” US debt debate. Failure by the United States to raise the debt ceiling would likely lead to a decline in the U.S. dollar and raise "doubts" among those using it as a reserve currency, Lagarde said. "One of the consequences could be a decline of the dollar as a reserve currency and a dent in people's confidence in the dollar." The U.S. currency has had an “exorbitant privilege because it was the reserve currency that most central banks had,” Lagarde said in an interview on PBS’s “Newshour” yesterday. “If there was a dent in this exorbitant privilege and the confidence that most people have towards the dollar, it would probably entail a decline of the dollar relative to other currencies.” The use of the “exorbitant privilege” phrase by the former French finance minister is important and not an accident. It echoes the former French President, Charles de Gaulle’s comment regarding the dollar being “America’s exorbitant privilege” at a landmark press conference in 1965 that led to the end of the London gold pool or government cartel which attempted to keep the gold price fixed at $35 per ounce.

When one things of Europe's default contagion, one traditionally thinks of the Club Ded countries along the Mediterranean. It may be time to change that after Denmark's CDS has surged by nearly 20% overnight, from 74 to 88, and by over a third since June 7, making it the worst performing government in the past month. The reason for this is that the country, which unlike other European nations, has allowed its insolvent banks to actually fail without masking their poor state. This in turn prompted S&P to come out with a report yesterday that as many as 15 more banks could default. In its report, S&P said that "In our base-case assumption, we estimate the gross loss due to additional bank failures to be Danish krona (DKK) 6 billion-DKK12 billion over a given three-year period. If the losses are larger than we expect, we would have to reassess our ratings on individual Danish banks, based on the impact of the fallout on each. Eleven banks have failed in Denmark since 2008. Although the banks were small by international standards, it is nevertheless an unusually high number for a developed market where bank defaults are generally rare events and extraordinary government support mostly averts losses to senior creditors. While the Danish regulatory authorities accept the concept of systemically important institutions, they have so far given no formal indication of which institutions fall under this definition. In our opinion, the banks we rate would be considered systemically important and therefore may receive extraordinary government support, beyond that defined in the country's established bank resolution scheme." So according to the rating agency any country that dares to avoid the Paulson-Summers TBTF doctrine is in prompt need of annihilation if we read this right. Either way, this latest black swan means that the crisis is creeping ever closer to German, which now has to fund two insolvency fronts: a southern and a north one. And when S&P finally puts France on downgrade review, the time to panic will have come and gone.

Who says only America has a major political crisis that threatens to destroy the country. Following earlier press reports that Spanish PM Zapatero would dissolve government on September 26 in order to have a new general election on November 20, which were summarily denied by the government immediately, it only took about 20 minutes for Zapatero to make a TV appearance and admit that there will indeed be early elections. And judging by the recent surge in popular protests a government overthrow appears certain, which means that Spain's entire role in the Euro bailout mechanisms will transfer from asset to a liability (which is great for German leadership aspirations for a Fourth Reich in which the fate of the entire Eurozone depends on its, and not the ECB's every whim, broader population be damned), and that Spain can kiss future austerity plans goodbye. The immediate result, though, was another major move in the EURUSD, which tumbled by another 60 pips following overnight news of Spain's downgrade review by Moody's. Overall, the EURUSD moved from a high of 1.4360 on the Boehner news all the way down to 1.4230. Our heartfelt condolences to all FX traders. In addition the Spain - Bund spread is 348, +7 the highest in two weeks, while the Italy Bund spread moved higher by +13 at 332, matching last week's record high. Bailout #3 beckons, only this time the EFSF will be a cool two trillion.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Just to make sure that we all get the message that a consolidated sell off across all asset classes is what the cental planning doctor ordered, here comes Moody's to not only trim all the gains in the EURUSD since the Boehner debacle, but to remind us that the Fourth Reich is coming, even as the US of Aa- still struggles to pass its 2009 budget. Oh, and as a reminder Moody's put Italy's Aa2 rating on downgrade review on June 17, which means the formal downgrade is due right...   about.... now.

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.